Maryland Higher Education Commission

Private (or Alternative) Student Loans

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 safeguards.
• 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 student loans.

What does it cost to obtain a private student loan?

The cost of the loan = the original loan amount + fees + compound interest.

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 amount.
• 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)

Interest Rate	Original Loan Amount	Final Cost of Loan Plus Interest
8% annual interest	$10,000	$17,201
12% annual interest	$10,000	$21,603
18% annual interest	$10,000	$28,987

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 understand something.
• 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 fees
       
               

Explore Private (or Alternative) Loans only after you have applied for all other sources of financial assistance.