What are private education loans?

Private education loans are loans  to college students made by financial institutions such as banks and credit unions. The do not require students to complete the FAFSA and students receive the money directly from the lender.

Many private loans appear to have lower interest rates than federal loans. However, these advertised rates are generally “best” rates that few applicants actually qualify for. You an see a selection of various private loans available at the New York State Higher Education Services Corporation.  According to an analysis by  the Consumer Financial Protection Bureau (CRPR) in the 2012 Private Student Loans Report, in the period from 1992-2011, those with the best credit rating would have paid less than the Stafford rate but the average borrower would have never paid a rate lower than the Stafford rate.

Private loans generally have longer repayment periods than federal loans and fewer repayment options. Federal loans have income-based repayment plans, pay as you earn plans for this with financial hardship, and forbearance or deferment options. None of these are available for private loans.

Furthermore, severe disability or death many not end your loan obligation. Depending on the loan, co-signers of private loans (which students need to get the best interest rates) may be required to repay the loan. Institutions that provide private education loans have every incentive to make such loans easy to get but little incentive to work with borrowers in time of financial hardship.  In general, there are very few situations where a student should take out a private loan.

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