Private Loans: Back to Basics

What are private loans?

Private loans, or "alternative loans," are a credit based student loan product used to cover educational costs like tuition, housing, food, books, etc. Private college loans are a great way to get money for college once you have exhausted scholarships, grants, and federal student loans. To learn more about the financial aid options you should explore before using private loans, check out our Financial Aid Planning section.

Why use private loans?

Although free money and low interest federal loans are obviously the best ways to pay for college, they often just aren't enough. Not all students qualify for scholarships and grants; federal loans have annual borrowing limits, based on your year in school. Unless you or your parents have cash or savings, you will probably need to borrow money for college. Alternative loans are often a less expensive financial option than using credit cards or personal loans. Private loans generally allow you to defer most or all of the payments on the loan until about 6 months after you leave school. Simply put, alternative loans are built with a student in mind.

What expenses do private loans cover?

Alternative loans can cover a variety of college expenses, including tuition, room & board, computer, lab fees, food, travel to/from school, books and more. Your school builds all of those expenses into a cost of attendance, which they publish annually.

How do private loans work?

Most private college loans today must be certified. That means that the lender will work with your school to verify your attendance and the amount you can borrow. The amount you can borrow in private loans each year is based on your school's cost of attendance minus any financial aid you have already received. The amount you can borrow may also be impacted by your credit history and that of your co-signer's (you must qualify for private loans).

If you have special circumstances that increase your college costs above your school's cost of attendance (such as you live across the country or your courses require you to purchase expensive equipment) you will need to talk to your financial aid office. If you can prove your expenses, they may certify your loan for the additional amount that you need.

How can I get approved for alternative loans?

Unlike most federal loans, alternative loans are credit-based. In order to get approved, most students will need to find a credit-worthy co-signer. Although students usually choose a parent, a co-signer can be any adult who qualifies and is willing to share the responsibility of the loan with you, such as a friend or relative.

It's important to understand that the current economic environment has impacted private loans. Private college lenders now require the student and co-signer to meet more stringent credit criteria to get approved. Check out our Understanding Credit section to learn more.