Private (or Alternative)
Why is information about private (or
alternative) student loans important?
After you have explored and applied for all federal aid,
Maryland State aid, and institutional financial for which you
are eligible, you may wish to investigate private (or
alternative) loans. You will want to be knowledgeable
about loans and know what alternatives you have before you sign
up for a private student loan that may require years of
repayment. You may need and be offered a private student
loan when your cost of education exceeds available personal
funds and federal and State financial aid. Private student
loans typically are very different from federal loans, contain
more restrictive terms, and are more expensive.
What are private student loans?
Private student loans are credit-based loans offered by
private banks or lending instruments with terms and conditions
that vary from lender to lender. These loans are similar
to personal loans you might receive when you purchase a car.
Most private student loans are available to U.S. citizens and
permanent residents attending schools within the USA; however,
not everyone is approved because a credit check and oftentimes a
co-signer are required. Private Alternative Student Loans
are NOT funded or guaranteed by the federal government.
Private Loans are a contract between you (the student) and the
private lender. You are responsible for repayment even if
the school you are attending closes and does not refund the loan
amount used in paying your cost of attendance.
How do private student loans differ from
federal student loans?
- Private lending companies are not required to offer the
same federally "guaranteed" low interest rates or student
- Federal loans may be discharged if your institution
closes while you are enrolled. Private loans may still
require you to repay the loan.
- Private loans are based on ability to repay the loan
rather than financial need.
- The interest rate for private student loans is based on
the credit rating of the student or co-signer and the amount
of the loan, so the interest rate may be higher if the
borrower's credit rating is poor or the loan amount is low.
- Options to postpone or lower payments may be limited and
subject to additional fees.
- There is no interest subsidy on private student loans as
there is on some federal loans, so the borrower is
responsible for repaying all of the interest, including the
interest that accrues while the student is attending school.
- Private student loans usually cannot be consolidated
(combined for easier repayments) with other loans.
- Tax deduction benefits may not be available on private
What does it cost to obtain a private
The cost of the loan = the original loan amount + fees +
A breakdown of the various loan charges is provided below.
Note that "fees" are the lender's cost for processing, issuing
and maintaining the loan.
- Origination fees: Generally, origination fees
range from 5% to 10% of the original amount, paid up-front.
That means that a 7.5% origination fee for a $10,000 private
student loan would amount to $750 in additional costs.
- Service fees: These are charges for processing
additional paperwork, usually changes in the loan for items
like deferment, forbearance or early repayment.
- Interest: The ongoing fee that lenders charge you
to use their money to pay for your education. The
interest is a percentage of the outstanding (remaining) loan
- Interest rates differ from lender to lender from student
to student and historically have varied from 6.5% to 18.5%.
- After analyzing a student or a co-signer's credit rating
and loan amount, the lender sets the loan's interest rate
proportionately. A higher interest rate is usually
required for borrower's whose credit rating is poor and
whose loan amount is low.
What a Private Student Loan Costs
Interest Costs for a
15-year, $10,000 Loan Based on Different Interest Rates)
Original Loan Amount
Final Cost of Loan Plus Interest
8% annual interest
12% annual interest
18% annual interest
Note: Typically, private lenders allow 10 to 25 years
for repayment. The longer the repayment period, the more
the loan will cost.
What's the relationship between a school
and a private lender?
The loan agreement signed at the school is a binding contract
between the private lender and the student borrower and, once
signed, the student has agreed to borrow and owe the lender the
money. Therefore, the student is usually still held
responsible for repaying the private loan even if the student
withdraws or is terminated, or if the school closes. For
that reason, it is especially important to know the school's
published refund policy.
How do you know if a private student loan
is right for you?
- Read and understand the contract before you sign.
- Ask questions before you sign if you do not clearly
- Because of the overall higher cost of a private student
loan, you should consider borrowing conservatively (only
what you need).
- Know how contract disputes will be settled (civil court
versus binding arbitration).
- Understand what may happen should you fail to make the
contracted payments you agree to make:
it may harm your credit rating
it may harm your co-signer's credit rating
it may harm the ability to obtain future credit (for cars,
appliances, other student
loans, homes, etc.)
you may get sued for entire
amount of the loan, immediately
you may be ineligible for deferments or forbearances
you may be held liable for the costs associated with
collecting your loan, including court costs and attorney
Explore Private (or Alternative) Loans only after you have
applied for all other sources of financial assistance.