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What are private student loans?

Private student loans—also known as personal student loans— are offered by private lenders to provide funds to pay for educational expenses. They are not part of the federal student loan program and generally do not feature the flexible repayment terms or borrower protections offered by federal student loans.

Current federal loans have a fixed interest rate and private student loans may have variable interest rates, meaning that your interest rate may change over time. The interest rates and fees you pay on a private student loan are based primarily on your credit history or credit score.

To get a better rate and loan terms, you may choose to apply for a private student loan with a co-signer, even if you can qualify for the loan on your own. In evaluating a loan application, lenders will look at your and your co-signer’s credit history. If your co-signer has a better credit score than you do, it could result in a lower interest rate and lower fees for your loan. However, a co-signer would be financially liable for the student loan if you are unable to make payments on the loan in the future.

Federal student loans can be a better option than private student loans in several important ways. Private student loans, including products like income share agreements, do not offer the same protections provided by federal student loans.

Is an income share agreement a private student loan?

Income share agreements, also known as ISAs, are a type of credit product or private student loan where you get money in advance to finance your education and in exchange for the advanced money, you generally promise to make payments based on a percentage of your income until either you have repaid a defined amount, or a specified period has elapsed.

Terms and conditions of income share agreements may vary. For example, the percentage of your income you are obligated to pay may vary based on your educational program. Income share agreements are generally subject to federal consumer financial laws.

Generally, it is a good idea to use federal student loans (if available) and other options—such as scholarships and grants—before you enter into an income share agreement or take out a traditional private student loan.

Payments made under an income share agreement are based on your income, which means your payments fluctuate over time based on changes in your income. If you earn more income, you may be required to pay more each month until you have paid an agreed upon maximum amount (or “payment cap”) or reached the end of the repayment period. On the other hand, if your income is below a certain threshold, you may not owe anything each month. Considering your future income can help you determine how much you will pay over the life of the agreement.

Be sure to read the terms and conditions and fully understand them before opting for an income share agreement. If you’re considering taking on more than one income share agreement, keep in mind that the income percentage obligation is contract specific, which means that you are committing an additional percentage of your income with each new agreement.

Learn more about the different ways to pay for your education.