Why Do Private Student Loans Have Such High Interest Rates?
Private student loans carry higher loan interest rates than federal student loans for several reasons. Private lenders are not subject to the same restrictions as those who participate in the federal student loan program with respect to the amount of money they lend and the terms for repayment of the debt. Because of their ability to lend to anyone without regard to credit history or rating, a private student loan is free to base its rates on the prevailing market interest rates in order to price their student loans. The higher interest rates charged on private student loans account for the risk inherent with accepting all types of credit profiles. The amount of interest that a private student loan charges in excess of what is charged on a federal student loan is a risk premium. The private loan’s risk premium is a hedge against defaults or loan failure associated with a certain class of borrowers. Statutory Limits on Federal Student Loan Interest Rates The federal government sets the
