Advocates of private student loans suggest that they combine the best elements of the different government loans into one: They generally offer higher loan limits than direct-to-student federal loans, ensuring the student is not left with a budget gap.
But unlike to-the-parent government loans, they generally offer a grace period with no payments due until after graduation. This grace period ranges as high as 12 months after graduation, though most private lenders offer six months.
Private
loans generally come in two types: school-channel and
direct-to-consumer.
School-channel loans offer borrowers lower interest rates but
generally take longer to process. School-channel loans are
'certified' by the school, which means the school signs off on the
borrowing amount, and the funds for school-channel loans are
disbursed directly to the school.
Direct-to-consumer private loans are not certified by the
school; schools don't interact with a direct-to-consumer private
loan at all. The student simply supplies enrollment verification to
the lender, and the loan proceeds are disbursed directly to the
student. While direct-to-consumer loans generally carry higher
interest rates than school-channel loans, they do allow families to
get access to funds very quickly — in some cases, in a matter of
days. Some argue that this convenience is offset by the risk of
student over-borrowing and/or use of funds for inappropriate
purposes, since there is no third-party certification that the
amount of the loan is appropriate for the education finance needs of
the student in question.
Direct-to-consumer private loans are the fastest growing segment of
education finance and, as such, a number of providers are
introducing products. Loan providers range from large education
finance companies to specialty companies that focus exclusively on
this niche. Such loans will often be distinguished by the indication
that "no FAFSA is required" or "Funds disbursed directly to you."