Private student loans are those that are provided by private entities or lenders without any backing. In federal loans the capital is backed or guaranteed by the government; however in private loans that is not the case. Such private loans are provided by banks and other financial institutions and advocates of these loans suggest that they offer a better interest rate and higher amount of loan itself compared to federal loans.

• The interest rates are determined by the lender and the underwriting process is also done by the same institution. Since students do not have sufficient or any credit history, the interest rates may vary considerably according to the lender. This means that the rates offered by a lender should not be blindly accepted since lower interest loans may be available.
• Since private student loans are subject to unique treatment in the happening of a personal bankruptcy, students might not invite a total debt surplus of the price of attendance, taking into account scholarships, fellowships, federal loans and private loans. Some of the companies that offer these loans are Citibank, Sallie Mae, Keybank, NextStudent Loans, Think Student loans, Graduate leverage and Chase bank.
• There are two types of private student loans – School channel and Direct to consumer. School channel loans take longer to process since the school certifies the loan. However direct to consumer loans are readily available but have a higher interest rate compared to School channel loans. If the student has a good academic record then the school channel loans are a better option because they usually offer lower interest rates.
• Unlike interest rates in Federal loans the interest on private student loans is not fixed. The interest charged can vary according to the credit history of the student or the student’s family. People with good credit rating can enjoy as much as six percent lower interest rates compared to those with a poor credit history. Moreover private student loans may have substantial origination fees which should also be considered while applying for a loan.
• Private student loans also have an origination fees which is payable up-front to the lender. Sometimes the lender may waive the origination fee and increase the interest or vice-versa. All lenders are legally bound to provide the borrower with the correct APR (Annual Percentage Rate) before the contract is signed. This helps in preventing fraud and predatory lending practices.
• The terms and conditions of private student loans can vary from one lender to another. Shopping around too much can affect your credit score since a number of inquiries about the interest rates and terms and condition cont as ‘hard” inquiries that negatively affect your credit score. However it is advisable to look for options and not accept the terms blindly given by the first lender you deal with.
• Private student loans are recommended for people who have a good credit history along with a better than average academic record. Since these loans are not guaranteed, the lenders look for these aspects in order to determine the creditworthiness of the borrower and assess the risk involved in lending to a particular student.

If you have any additional points or facts about private student loans, please feel free to leave a comment.