A student loan that is not backed by the federal government.
There are two primary types of private student loans: 1) School-channel loans -- Private loans that are approved by the borrower's school, generally have lower interest rates than other student loans, and which distribute funds directly to the school; and 2) Direct-to-consumer loans -- Loans that disburse funds to the borrower and limit the involvement of the respective financial institution to enrollment verification.
Private student loans are both similar to and different than federal student loans in a number of ways. While federal student loans have fixed interest rates, do not require a credit check for approval (since they're partially insured by the government), and have uniform rules regarding repayment issues, private student loans typically have variable rates (which makes one's monthly payments somewhat unpredictable), require an evaluation of the borrower's ability to repay amounts lent, and give the lender autonomy in raising rates or assessing penalties in the event of payment issues. Private student loans do not require repayment until after a borrower graduates either, unlike federal loans. There are also statutes of limitations that dictate the length of time during which you can be sued for private student loan debt, while federal student loans are never time-barred.
Private student loans and federal student loans are both exempt from bankruptcy protection, and missed payments for both are noted on your major credit reports.
Private student loans tend to have higher interest rates and fees than federal student loans given that they are not insured by the government and are therefore far riskier for lenders to offer. As a result, a private student loan should always be your second option. Most people use private student loans only to cover educational expenses beyond what their federal loans can pay for.
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