Private Loans: Another Way to Pay for College

College has become so expensive that most people need to take out a loan in order to pay for it. Students and parents who need help paying for college have the option of taking out a federal loan, a private loan, or both in some circumstances. Each type of loan has its own qualification requirements, as well as advantages and disadvantages. Read on to find out more about private loans for college and the differences between these loans and federal student loans.

Private Loans vs. Federal Loans

Federal student loans are funded by the federal government. There are several different types of federal student loans, including one option specifically designed for parents of undergraduate students known as the Parent PLUS Loan.

To qualify for a federal loan, an applicant must meet certain eligibility requirements. For example, while federal loans don't require a credit check, most programs require an applicant to demonstrate financial need. Also, in order to qualify for a federal student loan, a person must be a U.S. citizen or an eligible noncitizen, such as a permanent resident. Finally, in order to continue receiving federal financial aid, the student must maintain satisfactory academic progress. While they carry many requirements, federal loans have many benefits as well, including a fixed interest rate, options for payment plans, and the ability to postpone payment.

Private student loans, on the other hand, are funded by banks, credit unions, or other types of private lenders. The terms and qualifications for the loan will vary according to the specific private loan, but generally all private loans require a credit check. Other factors for qualifying for a private loan can include your choice of college, your choice of study, and whether or not you have a co-signer. Private loans generally do not have set interest rates during the loan's lifetime, meaning that the interest rates can rise from one year to the next. Private student loans also usually have less flexible repayment options, and fewer options to defer or reduce payments.

Why a Private Loan May Be Necessary

In most cases, a federal loan will be a better option than a private loan. However, there are certain situations in which a private loan is a good option, including if a person has maxed out his or her federal student loan or is ineligible for a federal loan. As mentioned above, federal loans have certain eligibility requirements. If a person doesn't qualify because he or she doesn't meet the standard for financial need, or he or she is not a U.S. citizen or a permanent resident, the student's only other option for a student loan will be from a private lender.

In addition, a private loan can be a good alternative to a Federal Grad PLUS loan, which is a loan available to graduate and professional students. Grad PLUS loans have a fixed interest rate, but are not subsidized, meaning the interest accrues while enrolled in school. A private loan can be a good option for graduate and professional school students if they meet certain criteria, such as having a high credit score and being able to borrow at an interest rate that is much lower than 6.41 percent.

Defaulting on a Loan

In the event that a person fails to pay back the loan according to the agreed upon repayment schedule, also known as defaulting on a loan, a federal lender and a private lender have different options available to them. If a person defaults on a federal student loan, a federal lender can garnish the borrower's wages without having to go through the court system. A federal lender can also take any tax refund or Social Security check that would normally be due to the borrower. A private lender, on the other hand, can only garnish a borrower's wages by obtaining a court order. For this reason, private lenders will usually first attempt out-of-court methods, such as sending letters or placing phone calls to the borrower in default.

Filing a Complaint about a Private Loan

There are many common complaints when it comes to private student loans. These complaints include an unwillingness to consider loan modifications and payment processing problems. Unlike federal loans, which have flexible payment options if a person runs into financial distress, private lenders usually aren't cooperative about changing the payment plan.

Some borrowers also complain about problems with making payments or having their payments processed correctly. For example, people have reported that their private student loan servicer will process partial payments to maximize late fees for the borrower. Other problems with making payments include losing checks, which result in late fees, and failure to provide notice of a new servicer, which can cause frustration, late fees, and even the risk of delinquency.

If a person has a complaint or issue with their private loan, he or she has the option of filing a complaint with the Consumer Financial Protection Bureau (CFPB). After a complaint is filed, the CFPB contacts the lender with the complaint. The lender has 15 days to respond to the borrower and the CFPB, and generally the complaints are closed within 60 days. The CFPB also offers general information and advice for repaying student loans.

Getting Legal Help

If you have questions about a private loan for college, you may want to contact an education attorney in your area.

Related Resources:

Next Steps

Contact a qualified education attorney to help you navigate education rights and laws.

Help Me Find a Do-It-Yourself Solution