Considering Private College Loans

In 2013, nearly 70 percent of graduating seniors left college with student-loan debt, debt that averaged nearly $30,000 per grad. Most young people can’t finish college without financial aid. If you are amongst those who need monetary assistance for your education, you first have to decide where to get it. Federal student loans offer an attractive option, but many students go with private college loans. Here’s what you need to know when comparing federal and private student loans.

What Is a Private College Loan?

The federal government offers regulated loans for students who need help paying for college and university tuition. Either the government or the school serves as the lender. A private college loan comes from a traditional financial institution, such as a bank or credit union. It’s not much different from a car loan or a mortgage except that you use the funds for tuition rather than a vehicle or a home. Federal student loans and private college loans share two things: both require you to pay back the loan and both allow you to defer payment until you graduate. Why, then, should you choose one over the other? Let’s touch on some deciding factors.

Interest Rates

Most students are attracted to federal student loans because of the low interest rates. Even though they have to pay back the money, they don’t have to pay much on top of the principle. Private college loans, however, sometimes charge much more in interest. Your interest rate, however, depends largely on the risk you represent to the lender. If you or your parents have excellent credit, for instance, you might qualify for a private loan rate that equals (or betters) that of a federal loan.

Information Disclosure

To receive federal student loans, you must complete the FAFSA form. This document requires lots of data about you and your parents, including your bank statements, income, tax records, and other personal information. A private college loan might not demand this level of disclosure if you have a solid credit history. This could save you time and hassle while keeping sensitive information more private.


Federal student-loan programs limit the potential uses for the money you receive. Most programs allow you to use the money to pay for on-campus housing but not an off-campus apartment, for instance. If you need to get more creative with your student loan money, a private loan might prove more practical as it allows more choice and flexibility.


A federal student loan will offer more flexibility in terms of repayment and deferment. In rare cases, the federal government discharges or forgives loans based on specific circumstances. Additionally, you can defer your payments for a period of time if you meet certain criteria, such as long-term unemployment, returning to school, or serving in the military. You shouldn’t count on catching any of these breaks (and remember that deferred does not mean erased) but you should be aware of them.

Neither a federal student loan nor a private college loan represents the ideal choice for every student. When deciding how to pay for college, submit applications to multiple lenders and evaluate the response of each based on your needs. Get as many viable funding options as possible and sit down with your family (and anyone else involved in your college finances) and compare the pros and cons of each offer head to head.

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