Approximately 7.9% or $131 billion of student debt in the United States is held by private companies rather than the federal government.
Private student loans differ from those traditionally offered by the federal government under the Free Application for Federal Student Aid (FAFSA) because they are offered by schools, banks, credit unions and other lenders.
These loans are offered by private companies and usually come with a few requirements that borrowers should be aware of.
First, the students must be registered in a qualified setting Higher Education. Generally, students who attend four-year colleges and universities are eligible for private loans. However, those who attend community colleges or trade schools may have fewer options for private lending.
In most cases, private student loans must be used to cover tuition fees and cannot be used by the borrower to cover other expenses like accommodation or food. In some cases, the company will pay the university directly, which means that the the borrower never receives the funds directly.
When applying for a private loan, companies will often perform a credit check and ask that proof of employment or income must be provided. According to the lender, a credit score of at least 600-650 may be needed to qualify. If unable to meet the financial or employment requirements, the company may require a co-signer to take out the loan with the student. This information is generally not required when applying for a federal student loan which may make it a better option for some.
Be aware of high interest rates
Although some borrowers may have access to private loans at interest rates lower than those offered by the federal government, this is not always the case. Federal loans, by law, have many a such as fixed interest rates and income-driven repayment plans. A variable interest rate could allow the rate to increase over the life of the loan. Borrowers should be aware of this before signing contracts, as many graduates suffer from repaying their loans quickly due to high interest rates. However, like federal loans, interest is tax deductible.
Private loans may also require students to begin making loan payments before graduation.
When will the student loan moratorium expire?
President Biden announced another extension of the moratorium on student loans until August 30.
It comes as pressure mounts from his own party to cancel student loans. During the election campaign, then-candidate Biden promised to cancel anywhere between $10,000 and $50,000 debt for each borrower.
Since taking office, the White House has made it clear that if Congress passes bill to cancel student debt held by the federal government, President Biden would be willing to sign the bill. However, he is unwilling to take executive action on the matter at this stage.