Private Student Loans

A private student loan is an extension of credit made expressly, in whole or in part, for postsecondary educational expenses that is not made, insured or guaranteed under title IV of the Higher Education Act. That is the definition used in the federal regulation at 12 CFR 1026.46(b)(5), where the term of art is "private education loan"; the phrase most families use is "private student loan," and nothing turns on the difference. Because it sits outside the federal student loan programs, its interest rate, repayment terms, hardship options and cosigner rules are set by the loan contract and constrained by general consumer credit law, principally the Truth in Lending Act.

A private student loan is underwritten. The lender is deciding whether it expects to be repaid, so it looks at credit history, income and often the program of study. That produces the defining feature of this market: most undergraduates have no meaningful credit file, so approval usually depends on a cosigner, and the rate the family is offered is largely the cosigner's rate. A cosigner is not a character reference. They are jointly liable from the first day, the debt appears on their credit report, and it counts against them when they apply for a mortgage.

Cosigner release programs exist at many lenders, typically after a run of on-time payments by the student, but they are contractual rather than statutory and lenders may decline. Two protections are statutory. Under 15 USC 1650(g)(1) a lender may not declare a default or accelerate the debt against the student obligor solely because a cosigner died or filed bankruptcy. Under (g)(2)(A), when notified of the student obligor's death the holder "shall release within a reasonable timeframe any cosigner from the obligations of the cosigner." Note precisely what that does and does not do. It addresses the cosigner. It says nothing about the borrower's estate, and whether the estate remains liable turns on the contract and state law. Some lenders discharge on death as a matter of policy. Both protections were added by a 2018 amendment that applies only to private education loan agreements entered into on or after November 20, 2018, which is 180 days after that Act was signed, so a loan taken out before then is not covered.

Bankruptcy treats most private student debt the same way it treats federal debt, which surprises people who assume private debt is easier to shed. 11 USC 523(a)(8)(B) excepts from discharge "any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986," absent undue hardship established in a separate adversary proceeding. The exception inside the exception is the useful part. A private loan that falls outside the tax code's definition, for instance one that exceeded cost of attendance or funded study at an institution that is not eligible, is not covered by that paragraph and is dischargeable on ordinary terms.

The Truth in Lending Act imposes a three-disclosure sequence on private education loans under 12 CFR 1026.47, and the two clocks attached to it are the part borrowers most often get wrong.

Disclosure one, at application or solicitation. The lender discloses rate ranges, fees, repayment terms and the alternatives, including a statement that federal aid may be available on better terms.

Disclosure two, at approval, starts a 30-calendar-day acceptance window. Under 12 CFR 1026.48(c)(1) the consumer "has the right to accept the terms of a private education loan at any time within 30 calendar days" after receiving the approval disclosure, and under (c)(2) the lender generally may not change the rate or terms during that window. That is a genuine shopping period, and it exists so a family can compare offers without an approval expiring underneath them.

Disclosure three, at final approval, starts a three-business-day cancellation window. Under 12 CFR 1026.48(d) the consumer may cancel "without penalty, until midnight of the third business day" after receiving the final disclosure, and "no funds may be disbursed for a private education loan until the three-business day period has expired."

Thirty calendar days to accept and three business days to cancel are separate rights, running from different disclosures, and treating the shorter one as the whole protection is the common error.

Two further rules sit in the same subpart. Under 12 CFR 1026.48(e) the lender must obtain the school self-certification form before the loan is consummated, which gives the financial aid office a chance to tell the family they have federal eligibility they have not used. And 12 CFR 1026.48(a) prohibits a lender from co-branding, meaning it may not use a college's name, logo or mascot in a way implying the college endorses its loans, absent a disclosed endorsed-lender arrangement.

A hypothetical, resolving a decision rather than an amount. The Okonjos have a federal Direct Loan at a fixed rate and a private offer at a lower advertised variable rate, and are considering refinancing the federal loan into the private one to save on interest. The rate comparison is not the decision. What the federal loan carries and the private loan cannot is a set of statutory entitlements: income-driven repayment, eligibility for public service loan forgiveness, discharge on death or total and permanent disability, and deferment rights that do not depend on a lender's goodwill. Refinancing hands those over permanently, and no later transaction can buy them back. Whether that is worth a lower rate depends on how likely the household is to need any of them.

Pros

• Fills a gap after federal aid, grants and scholarships are exhausted, including for a family that has hit the federal annual or aggregate limits.
• A borrower or cosigner with strong credit may be offered a rate below the federal PLUS rate.
• Terms are negotiable in a way federal loans are not, and lenders compete on rate, fees and repayment structure.
• The 30-day acceptance window with locked terms makes genuine comparison shopping possible.

Cons

• No income-driven repayment, no public service loan forgiveness, and no statutory right to deferment. Hardship relief is whatever the contract allows.
• A cosigner is jointly liable from day one, and release is a lender policy rather than a right.
• Most private student debt is excepted from bankruptcy discharge on the same undue-hardship standard that applies to federal loans.
• A variable rate can rise for the life of a loan that may run 10 to 20 years.
• Nothing in the pricing accounts for the borrower's future income, so the payment does not fall if the degree does not pay off.