Private Student Loans
Private student loans include non-federal loans from commercial lenders and from non-profit state loan programs. Most interest rates on private student loans are variable, although some lenders have started offering fixed rates with short repayment terms. More than 90% of new private student loans require a creditworthy cosigner. (A cosigner is a coborrower, equally obligated to repay the debt.) Interest rates are usually based on the borrower's credit scores and the credit scores of the cosigner. Very few borrowers get the lender's lowest interest rate; the majority get the highest interest rate. Repayment terms are less flexible than the federal education loans.
There are also a variety of non-education loans, such as home equity lines of credit (HELOC), home equity loans and credit cards. Repayment on these loans begins immediately. These loans usually do not offer deferments, forbearances, loan forgiveness or flexible repayment plans. The monthly payment on a credit card is usually a percentage of the outstanding balance, yielding a higher initial minimum monthly payment that decreases over time.
Loan Interest Deductions
Up to $2,500 in interest paid on federal and private student loans is deductible on the borrower's federal income tax return as an above-the-line exclusion from income. The taxpayer does not need to itemize to take advantage of this student loan interest deduction. Interest paid on up to $100,000 in principal on a home equity loan or HELOC is also deductible, but only if the taxpayer itemizes. This deduction may be limited if the taxpayer is subject to the Alternative Minimum Tax (AMT).