Private student loans are offered to students to pay for college-related expenses. Unlike federal loans which are granted by the United States Department of Education, private loans are offered by banks, credit unions, or online lenders.
Cost: Private student loans are generally more expensive as they have higher interest rates and there are no forgiveness options like for federal student loans. Experts advise taking out private student loans only to pay for expenses not covered under your school’s scholarship programs or the federal student loan you have applied for. That way, you will have a relatively smaller amount to pay off with a private student loan.
Credit score and the maximum amount you can borrow: Lenders generally grant private student loans to people with a good credit score (670+ FICO® Score or 661+ VantageScore®) and steady income. Since most students don’t have either of these, a cosigner (like a parent or legal guardian) helps them apply for the loan. The maximum you can borrow with a private student loan is the cost of your college attendance (tuition, books, room, transportation, and other personal expenses) excluding any financial aid.
Interest rates: Private loans have a higher interest rate than federal loans. A good credit score gets you lower interest rates. You can either have fixed or variable interest rates. Fixed interest rates remain the same through the period of your loan and variable interest rates change. Most private loans allow you to begin making payments after you leave school. Others may require you to pay only interest or a fixed amount while you’re still enrolled. Even if you can begin paying back the loan after graduating, the interest on your loan still accrues during the period, adding to the total you have to pay later.
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