Understanding Loans: Private Student Loans

Supplemental private student loans are one way students and families can fill the gap between available student financial aid — including federal student loans — and the total cost of college.

Private student loans must be repaid with interest. They are a serious financial obligation and typically cannot be discharged in bankruptcy.

Interest Rates, Fees and Benefits

Like other loans, private student loans have either a fixed or variable interest rate that is set by the lender. Interest accrues daily on student loans.

Private student loan borrowers may be charged fees, such as an origination or late fee, but may also qualify for benefits, such as interest rate or principal balance reductions and cosigner releases.

Interest Charges

Interest accrues daily based on the principal balance of student loans as of that day and the interest rate.

Student loans accrue interest daily on a simple interest formula:

Principal balance x interest rate / number of days in this year = daily outstanding interest

For a loan with a principal balance of $6,300 with 6.00% fixed interest during a non leap year, the daily interest would be calculated as: $6,300 x 0.06 / 365 = $1.0356

You would accrue $1.0356 in interest every day as long as your principal balance is $6,300. If there were 30 days from your last payment and all previous outstanding interest was paid with your last payment, the monthly interest in this example would be $31.07.

Repayment

Depending on the terms of the private student loan you choose, you may need to make some sort of monthly payment while in school — such as interest-only payments — or you may defer any repayment until after you graduate. Deferring payments for an extended period of time, such as postponing payments while you're in school, may substantially increase your loan balance before any payments are due because of interest that accrues during deferment. We strongly encourage you to make payments that at least cover your accrued interest to avoid increases in your loan balance.

Cosigners

Traditional-age college students may need cosigners to qualify for a private student loan if they don't have the credit history to qualify for the loan on their own. Even if a borrower can qualify for a private student loan on his or her own merit, a cosigner may help the borrower qualify for a loan with a lower interest rate.

Fixed and Variable Interest Rates

Private student loans have either a fixed or a variable interest rate, which is published with the other loan terms when you take out the loan.

Fixed interest rates are set for the life of the loan and cannot change. Under standard or regular repayment plans, if you pay your minimum payment on time each month, every monthly payment amount will remain the same.

Variable interest rates are determined using a formula, usually a set interest rate plus a market rate index such as Prime or Libor (London Interbank Offered Rate). Variable rates may change daily, monthly, quarterly or annually depending on the formula used. Because these rates may fluctuate over time based on financial markets, your minimum monthly payment amount may change based on the rate being charged for that time period.