Why Private Student Loans at All?

In addition to the many types of federal or government loans available to students in the US, there are also many banks and other financial organizations offering private student loans to those in need. Why should you care about these, and what can they offer you that federal loans cannot? Here's a brief summary of the situation.

Private Student Loans versus Direct-to-Student

Most direct-to-student federal loans are severely limited in the amount that is actually disbursed. The final figure depends upon the government's assessment of your actual needs, as opposed to what you demand. An unsubsidized Stafford loan, for instance, will give you a maximum of $18500 per year. This may leave you in a situation where not all of your needs are covered by the aid you receive. And this is where private student loans come into the picture.
Private student loans have a higher interest rate than direct-to-student federal loans, but they also have a much higher ceiling. You could easily cover the complete cost of your education with one of these, inclusive of food, board and other expenses.

Private Student Loans versus Direct-to-Parent

Some federal loans, like the PLUS loans which are given out to parents (and recently also to graduate students) also have a high ceiling, but the interest rate, currently at 8.5% per annum, is higher than that of direct-to-student loans. Certain private student loans offer lower rates than these. Another advantage they have over the PLUS loans is that there is a grace period while you're in school, which can extend up to 12 months after you graduate, during which you do not need to make repayments.

A Hidden Cost and the Way Around It

Private student loans are demand-based, not need-based, which means that you can get as much as you want within a reasonable limit. There is sometimes a one-time origination fee of 3% charged on the loan amount, but this can be lowered or even waived if you have an excellent credit history.