Private Student Loans

Private student loan summary:

• Private student loans are offered by loan companies and banks to cover educational expenses.

• Private student loans aren't backed by the federal government. They generally don’t offer flexible repayment plans, deferments, or subsidies such as those that may be available to federal borrowers. However, private student loans could be easier to settle or discharge in bankruptcy.

• Qualifying for private student loans could be harder than qualifying for a federal student loan. A co-signer is often required.

Private student loan definition and meaning

Private student loans are made by banks and other finance companies to cover educational expenses. They aren’t backed by the federal government. 

Key concept: A private student loan is a loan for educational expenses offered by banks and other lenders. It isn't part of a federal program.  

More about private student loans

Private student loan providers create their own programs with their own rules. Most advisors recommend applying for education grants and federal student loans first, then using private loans to make up any shortfall. 

Some people use private student loans for programs and costs that may be ineligible for federal funding. 

You could use a private student loan for:

• Undergraduate programs

• Graduate school

• Career training or vocational school

• Bar exam study

• MBA programs

• Medical training and residency

• Dental school and residency

• Flight school

• Nursing school and health profession graduate programs

Private vs. federal student loans

The reason most experts recommend starting with federal programs is the protections they offer. Those protections could be a lifesaver if you have trouble affording your payments. For example, on some income-based repayment plans, your federal student loan payment could be as low as zero. That’s not an option with private student loans.

The main differences between private and federal student loans are:

• Federal loans require you to complete the Free Application for Federal Student Aid, or FAFSA. For private loans, you'd apply directly with lenders.

• Federal loans don't consider your credit score. Private lenders check your credit.

• Private lenders may allow larger loans (up to the cost of attendance, less any other financial aid received).

• Private lenders may require a co-signer.

• Private lenders don't generally allow you to change repayment terms after borrowing. 

• Private student loan balances could be easier to discharge in bankruptcy.

Settling or discharging private student loans 

The Consumer Financial Protection Bureau (CFPB) says it's a myth that private student loan balances can't be discharged in bankruptcy. In fact, both private and federal student loans can be discharged if you go through an extra step in your bankruptcy and prove that repaying your loan would cause undue hardship that isn’t likely to change. 

In addition, some private student loan balances could be discharged (forgiven) in a bankruptcy, just like other debts. For example:

• Where the loan amount exceeds the cost of tuition, books, room and board

• For programs at unaccredited colleges, a school in a foreign country, or unaccredited training, and trade certificate programs

• For fees and living expenses incurred while studying for the bar exam or other professional exams

• For fees, living expenses, and moving costs associated with medical or dental residency

• To a student attending school less than half-time

The CFPB noted that some loan servicers have misled their borrowers and made them believe that they had no solution for unaffordable private student loans. In fact, these loans may be dischargeable in bankruptcy or, if in default, negotiated with a debt relief plan. If you're having trouble affording private student loans, contact your loan servicer first to find out what your options are.