When federal, state, and institutional financial aid don't quite cover your college costs, you might consider private loans. To help you make an informed decision about taking out a private loan, Congress passed legislation that requires you to complete and file a Private Education Loan Applicant Self-Certification Form with your lender before you receive a private loan. The purpose of this form is to inform you that:
- Free or lower-cost federal, state, or school aid may be available in place of, or in addition to, a more costly private loan
- Receipt of a private education loan may reduce your eligibility for free or low-cost federal, state, or school aid
- To apply for federal grants, loans, and work-study, you must submit a Free Application for Federal Student Aid (FAFSA)
If you have questions about student loans, private or otherwise, talk to your school's financial aid office.
How does a private loan differ from a federal loan?
Private loans differ from federal loans in a variety of ways. First, the Department of Education makes federal student loans; you'll have to find a lender who makes private loans. Your school may be able to provide you with the names of some lenders who make private loans to their students. The lender generally will perform a credit check to determine whether to approve the loan. If you have adverse credit, or lack sufficient credit history, your application may be denied or you may be asked to provide a co-signer (also known as an endorser) with a good credit history. Many federal loans do not have a credit requirement.
There are other important differences that include loan fees and interest rates, which generally are higher for private loans. Also, repayment terms usually are not as flexible as they are for federal loans. And, deferment options are more limited, and few, if any, lenders offer options to discharge (forgive) a private loan under certain circumstances.
The following table lists some differences between private and federal loans. To weigh your options, review the "Questions to ask" column for each factor.
|Factors to consider||Private loans||Federal loans||Questions to ask|
|Interest rates||Variable interest rates are tied to key interest rates, such as LIBOR or PRIME, plus a margin. The interest rate offered by the lender may also depend on your credit rating or the rating of your co-signer, as well as other non-financial factors.||Federally-set, fixed interest rate by loan type.||Which loan offers the best interest rate? How often does the interest rate vary? What rate will you qualify for based on your credit rating?|
|Loan fees and late charges||Lenders may set loan fees and late charges based on your credit rating or the rating of your co-signer.||Federally-set loan fees by loan type. Federally-set late charges.||What are the repercussions to your loan balance, interest rate, and credit rating if you're late on a loan payment?|
|Repayment options||Loan discharge, loan forgiveness, and forbearance are generally not available; and deferment options are limited.||Certain eligible borrowers may elect to defer repayment or request a forbearance. Loan discharge and forgiveness are available under certain circumstances.||If you return to school, experience economic hardship, become totally and permanently disabled, or die, what are your responsibilities toward your loan? Can your obligation be deferred or discharged?|
|Cosigners/Endorsers||Lenders generally require a credit check and may have other lending criteria such as a minimum loan amount, a creditworthy co-signer, or an income requirement.||A co-signer is not required for a Federal Stafford Loan. However, one may be required for a Federal PLUS Loan, either for a parent borrower on behalf of a dependent undergraduate student, or for a graduate or professional student borrower.||Do you have a good credit rating? What other lending criteria does the lender have? If you need a co-signer, do you have someone who is willing to co-sign with you? Is your co-signer creditworthy?|
How do I compare private loans?
You should begin researching the various private loans available. Make sure when you consider the loan terms, you compare apples-to-apples so that you can make the most informed decision possible.
For each private loan that you research, find out the following information:
- Interest rates: What is the interest rate on the loan? How often does it vary and how is it calculated? How does obtaining a creditworthy endorser or cosigner affect the interest rate? When does interest begin accruing? If you cannot afford to make payments while attending school, will the lender postpone payments and allow the interest to be capitalized (added to the principal)? if so, how often will capitalization occur?
- Loan fees: What are the loan fees? How are they collected — are they charged on top of the requested loan amount or subtracted from the total loan amount to be disbursed? Will you be charged a fee when you enter repayment? Are there fees associated with prepaying the loan?
- Repayment terms and period: When will you begin repayment on the loan? Can repayment be postponed until after you graduate or leave school? What are your various repayment options and what are their advantages and disadvantages? How long will you have to repay the loan? If you use the maximum or minimum repayment period, what amount of interest will you pay over the life of the loan? What is the charge for a late payment?
- Repayment incentives: Are there any rewards for a certain number of on-time payments in terms of principal reductions, interest rate reductions, or forgiveness of remaining balances below a certain amount?
How do I apply for a private loan?
Before borrowing a private loan, carefully consider your debt and repayment obligations on all loans. Determine how much you need to borrow by working out a budget for your educational costs and subtracting all of your available resources for those costs.
Remember: Borrow only what you need. Private loans must be repaid in addition to any federal loans you may borrow. You should not — and may not be permitted to — borrow a private loan for more than your cost of attendance for the period of enrollment (usually the school year) minus any other federal, state, and institutional aid you have or will be awarded for that period.
If you've decided to apply for a private loan, here are the general steps to follow to begin the application process.
- Contact your financial aid office to inform them of your interest in a private loan and, in some cases, to obtain the Private Education Loan Applicant Self-Certification Form.
- Check with your lender regarding an online application/promissory note process and whether the Private Education Loan Applicant Self-Certification Form is part of this process or is handled a different way. Ask if the lender needs additional documentation to determine whether you qualify for the loan. If an online promissory note is not available and the lender instead sends you a paper promissory note and a Private Education Loan Applicant Self-Certification Form, follow directions for completing and returning the forms.
- Your lender will provide you with several loan disclosures before funding your private loan. Read them carefully as they provide you with important information about accepting and cancelling your loan. Upon approval of your loan, you will receive a disclosure from the lender that requires you to accept the terms and conditions of the loan within a specified deadline. At this point, you should continue to carefully consider whether you need a private loan. Prior to disbursement of your loan, you will receive one last disclosure. You will have three business days after this disclosure to make your decision. After the three-day period, if you have not indicated that you want to cancel the loan, the lender will disburse your loan money.
- Contact your lender's customer service center with questions regarding interest rates, loan terms, etc.
- Maintain your application/promissory note and other loan-related records in one file to help you understand your loan obligations. Your promissory note describes your rights and responsibilities associated with your private loan.
- Borrow only what you need. Be an informed borrower. Know the total amount you have borrowed, the interest rate applicable to your loan(s), and your repayment requirements for all loans you borrow.
Here are other documents located on www.tgslc.org that you may be interested in:
- About Student Loans | Understand the difference between federal, private, and state loans.
- About Student Loans | Federal Direct Loan Program (FDLP)