MONEYSCHOOL'S Simplified Guide
to FAFSA and Federal Student Aid

Section 17: Private Student Loans

It is extremely important to distinguish between the federal student loan programs described in this Guide and the private student loans offered by a number of lenders.  The FFEL loan program described in Section 5 is a federally-subsidized program where the loans are actually made by private lenders. FFEL loans are subject to the same rules as federal Direct loans. 

However, a number of banks and other private lenders, including some who also participate in the FFEL program, offer private student loans which are not subsidized or regulated like federal student loans.  Private student loans are much like any other consumer loan, except that they can’t be wiped out in bankruptcy.  They may involve a credit check, and a co-signer is often required.  Such loans typically entail high fees and high interest rates similar to credit card rates, and co-signers’ assets are in jeopardy in case of default. 

Our advice is to avoid private student loans like the plague.  There are serious risks involved in any student loan, including those sponsored by the federal government, but private loans are even more dangerous.  The only reason anyone should even consider a private loan is if all resources available through federal programs have been exhausted.  Even then a private loan may not be worth the risk.

The good news is that since the financial crisis of 2008, many lenders have stopped making private student loans, and federal programs have been expanded to take up the slack.