Private Student Loans: An Alternative to the Federal Option

Many students enrolling in or attending college are finding that federal student loans are a great way to finance their college education, but the annual aggregate limits are not enough to cover all of the annual expenses of attending many colleges and universities. Although some students may receive grants and scholarships, or choose to work, not all students will benefit from getting additional aid.

Private or alternative loans can fill in the funding gaps that federal funding will leave. In addition, many students also find that some the private or alternative option will provide competitive interest rates and other benefits that are similar or better than federal. Therefore, some students may choose to fund their entire education with privately instead of federally. The choice of how to fund a college education is an individual decision, and there are many things that should be considered before such a decision is made.

How To Get One

A borrower will need good credit to get a private loan. Borrowers can also use a cosigner with good credit to get a loan. Some students that are approved for a can also use a cosigner with better credit to get a better interest rate. Students will have to fill out a Free Application for Federal Student Aid or FAFSA before they can get a private loan. Filling out the FAFSA gives lenders and your school’s financial aid office the information they need to determine how much money you are eligible to borrow. Just like federal, private loans also require enrollment on at least a half-time basis at an accredited college or university.

Federal vs. Private Student Loans

Private student loans are similar to federal student loans, but they can also differ drastically in their interest rates, repayment terms and borrowing limits. Private or alternative student loans are similar to federal student loans in the following ways:

  • You must be enrolled in an accredited college or university
  • You must maintain your enrollment status at least half-time
  • Money can only be used for tuition, books and other related expenses
  • Most offer in-school deferment and a grace period after graduation

Private or alternative student loans also differ from federal student loans in the following ways:

  • No origination fees
  • Lower interest rates
  • Longer repayment periods
  • Loan amounts are usually higher

Differences Between Private And Personal

A personal loan is different from a private or alternative student loan in several aspects. The money from a personal loan can be used for anything, but private or alternative student loans can only be used for qualified college expenses. Personal loans have no enrollment requirements for half-time or full time status. Repayment on personal loans will usually begin immediately as there is no grace period or in-school deferment.

Benefits Of A Private Or Alternative Student Loan

1. Higher Loan Amounts

Private student loans usually allow students to borrow more money than Stafford or Perkins loans. Most private or alternative student loans will lend money up to the total cost of attendance, which determined by each school’s fiscal department. The cost of attendance (COA) is then subtracted from any outside financial aid you may receive to determine the amount of money you can borrow. Stafford and Perkins loans will offer only the maximum allowable amount regardless of the school’s cost of attendance. The following table illustrates the maximum you can borrow under each type of loan for an undergraduate dependent student:

Maximum Loan Limits for Stafford, Perkins and Most Private Student Loans
(Undergraduate Dependent Students)
Academic YearStafford LoanPerkins LoanMost Private Loans
Year 1$5,500$5,500Cost of Attendance minus outside aid received
Year 2$6,500$5,500Cost of Attendance minus outside aid received
Year 3 and beyond$7,500$5,500Cost of Attendance minus outside aid received

Some colleges and universities are far more expensive than others, and federal student loans will simply not be able to cover the additional costs of education beyond the annual limits. This makes private and alternative student loans a popular option that is begging to grow and make up a larger percentage of the student loan industry.

2. Longer Repayment Periods

The standard repayment period for Stafford and Perkins loans is 10 years regardless of total loan balance. Most private and alternative student loans will have repayment plans that span from 10-25 years. The repayment period may either be predetermined or may depend upon the total amount borrowed.

3. Lower Interest Rates

Private and alternative student loans can offer lower interest rates than Stafford and Perkins loans. Private lenders will set their interest rates at a percentage above PRIME or LIBOR, and other lenders will offer fixed interest rates. These interest rates are generally lower than the interest rates on unsubsidized federal Stafford loans, which are currently set at 6.8%. Many private lenders will also set their interest rates according to the borrower’s credit score, so borrowers with excellent credit can take advantage of the lowest offered rates. Interest rates on federal student loans are fixed regardless of credit score.

The Scoop On Private Lenders

There are hundreds of lenders that deal in private or alternative student loans. Some lenders are more popular than others because of their low interest rates, easy repayment terms, grace periods and customer service. While college students have a variety of options when it comes to their choice of lender, there are two companies that are the leaders in the private student loan industry.

Citi Student Loans

Citibank is one of the most popular lenders of private student loans. They offer student loans up to the cost of attendance (COA) with a repayment period of up to 15 years. Other popular features of a Citi Student Loan include a six month grace period and zero lending fees. You can find out more about a Citi student loan at www.studentloan.com.

Sallie Mae

Sallie Mae is considered the largest lender of private student loans. They also offer loan amounts up to the cost of attendance (COA) with repayment periods of 5-15 years depending on the size of the loan. Like Citi Student Loans, there are no loan fees. Sallie Mae also offers many repayment options to accommodate many economic situations a borrower may encounter. To find all of the great benefits and options of a Sallie Mae loan, visit them at www.salliemae.com.