What are Private Student Loans?
Private student loans are pretty much exactly what the name states, Private loans for students that lenders offer in an attempt to help students fill any gaps in their education expenses. These educational gaps can vary from a very small amount to help out with just that last bit of tuition that will need to be covered per your Award letter, or it can be used to fund your entire tuition, room and board, etc… Private Student loans are generally used to supplement federal student aid (Financial Aid) and are thus very beneficial to students that have either exhausted all options to pay their tuition shortfalls through scholarships, grants and student loans (Financial Aid). In some cases, private student loans are used to fully fund a student’s tuition should they be ineligible for Financial Aid. However, one key detractor is the fact that Private student loans are not subsidized and not guaranteed by the federal government. Since Private Student Loans are not backed by the federal government then the borrower is subject to the rules and regulations outlined by the lender, so make sure you are reading closely. In fact, this is such an important subject we have written a complete separate article that addresses the most Frequently Asked Questions (FAQ’s) about private student loans that will help you be prepared and comfortable when applying for these loans.
Private student loans also come in all shapes (interest rates) and sizes (loan amount). This can be very attractive to some student borrowers as it is quite possible, with the right credit score, co-signer, etc… to have an excess amount of money to get you through the school year, but borrowing responsibly is always recommended and some Private lenders will only let you borrow up to your total cost of attendance (COA) for the school in which you are enrolling in. As with Federal Loans, you are also able to get quite a big tax deduction…up to $2,500 to be exact according to the IRS.
Lastly, private student loans are with you until paid in full as they are protected from loan defaults just like Federal loans. What does this mean? It means that private student loans ( and Federal Loans) are not able to be dismissed in bankruptcy except in death or permanent disability. Much like Federal loans, if you are not able to make the payments on the loan you could face collection calls, ruined credit, wage garnishments from the IRS and even a lawsuit. It is important to keep in mind that there are a lot of options for Federal Loans and even private student loans to help the borrowers get through rough patches in your life, but that requires a commitment from you (the borrower) to actively seek out such accommodations. The worst thing you can do is ignore these calls as often times you will work out an agreement that will work for everyone.
If you are only borrowing what you need to complete your degree then you should feel confident in your ability to repay these loans once you have graduated and many private lenders will defer your payments while you are in school, but you need to shop around (on our site or Google, etc…) and understand the details outlined in the Master Promissory Note (MPN).