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Private Student Loans - What Are They?

Private student loans – sometimes known as alternative loans – are options for financing college costs that can bridge the financial gap between college costs and traditional funding sources, such as federal loans, grants and scholarships.

Private student loans are usually unsecured, which means approval is based on a financial institution’s assessment of the borrower’s ability to repay.

Borrowing an alternative loan is a serious financial commitment. Alternative loans have higher interest rates and most charge fees making them more expensive than federal loan options. Be sure to exhaust all federal loan eligibility before borrowing an alternative loan, including the Federal PLUS Loan. Learn about the Federal PLUS Loan.

If an alternative loan is needed, student borrowers will secure better terms and pricing by adding a credit worthy co-signer to their application. Always check the interest rate, fees, interest capitalization policy, repayment period, prepayment penalties and other terms and conditions of the loan before you sign a promissory note.

Interest rates, loan limits, interest capitalization policy, repayment options and prepayment penalties can vary – sometimes considerably – depending on the financial institution underwriting the loan.

It’s important to understand all the terms associated with a loan before you choose one.

Principal + Interest + Fees = Total Cost

When comparing private loan products, compare them based on their total cost: principal plus interest and fees.

Principal: The concept of a loan is pretty straightforward: first you borrow money and then you repay it. The original amount you borrow is known as the “principal” of the loan. But the amount you must repay is more than the original principal that you borrow because the lender charges you for the use of the money.

Interest: The additional charge on your loan is known as interest. Interest accrues on the principal balance of your loan. In addition, lenders may charge fees for the use of the money.

Fees: Lenders often charge fees when you borrow money. For comprehensive information on fees, visit Private Student Loans - Understanding Fees.