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Federal Vs. Private Student Loans

Federal Vs. Private Student Loans
Written by Publishing Team

Federal and private student loans are two ways college students can pay for their education. While federal loans are only available through the federal government, private student loans can come from a number of private lenders. Federal and private student loans have different interest rates, repayment terms, challenging options and different fees.

In most cases, federal student loans are the best because of the benefits that come with them. However, in cases where you have exhausted your federal loan benefits, it may be worth considering private student loans. When you’re comparing federal and private student loans, it’s important to understand the differences and how they can affect you throughout school and during repayment.

What are federal student loans?

Federal student loans are educational loans available through the US Department of Education. For each type of loan, the interest rate is the same for all borrowers, so you don’t have to worry about the rate you will get. Federal loans also come with a variety of benefits that can make your payment plan more affordable.

Federal Student Loan Benefits

There are many benefits to using federal student loans to help fund your college education, including:

  • Access to loan forgiveness: The PSLF and Teacher Loan Forgiveness programs are only available to federal student loan borrowers. If you qualify for a program, you may have at least $5,000 or the equivalent of a full student loan balance that is disbursed once the requirements are met.
  • Access to Income-Based Payment Plans: The Department of Education offers several income-driven payment plans, which can reduce your monthly payments to as little as 10 percent to 20 percent of your discretionary income. If you end up struggling to make your monthly payments, these plans can be lifesaving.
  • Little or no credit requirements: Most federal student loans do not require a credit check at all. With Direct PLUS Loans, it is only a credit check to determine if you have certain negative items in your credit history. If you don’t have a credit history or haven’t had the opportunity to build a good one, federal loans are still available.
  • Cheaper in general: For most students, federal student loans are likely to be cheaper than private student loans. This is especially the case for undergraduate students.

Disadvantages of Federal Student Loans

Although there are some obvious benefits to using federal loans, here are some potential pitfalls to watch out for:

  • Fees offered: The federal government charges an upfront loan fee on all of its loan products. Fees are relatively low for undergraduates but high for graduate students, professionals as well as parents.
  • Loan limits: Students are restricted in how much they can borrow, which may require them to eventually turn to private student loans to bridge the gap if their education costs are high.
  • No service option: When you apply for federal student loans, the Department of Education automatically assigns a service to you. If you have a bad experience, you can combine your loans with another provider, but this process leads to a slightly higher interest rate.

What are private student loans?

Private student loans are educational loans offered by private lenders, such as banks, credit unions, and online businesses. They require a credit check, and your approval and loan terms depend on your credit eligibility. It can be difficult for many students to get approval for private loans themselves, but many lenders allow you to apply with a signer to improve your chances.

Special Student Loan Benefits

Although it is best for most students to start with federal student loans, there are some advantages to using private loans if needed:

  • Higher loan amounts: Loan limits can vary from one lender to another, but you can generally come up with a total cost of attendance, which gives you more borrowing power from the federal government.
  • Opportunity for low interest rates: If you’re a graduate, student professional, or parent, it’s possible to get a lower interest rate through a private lender than with the federal government if you have good credit—sometimes three or four percentage points lower than the federal rate.
  • No upfront fee: Private lenders don’t usually charge an upfront fee on private student loans, which gives you savings right away.

Disadvantages of private student loans

Before getting a private student loan, consider some of the downsides:

  • No Federal Loan Interest: Private lenders do not offer student loan forgiveness programs, and most do not offer income-driven repayment plans. If you end up struggling financially, you may be able to get a carry plan, but options for lowering your monthly payments on a permanent basis are rare.
  • High interest rates for many: Since private loans require a credit check, people without a credit history or low credit score may end up with a loan that is more expensive than what the federal government offers — and that’s if you qualify in the first place.

Types of Federal Student Loans

Depending on where you are in school and your needs, there are a few different federal student loans you can choose from:

  • Unsubsidized direct loans: These loans are available for undergraduate, graduate, and professional students, come at a fixed interest rate, and interest starts accruing once the loan is disbursed. The life loan limit is $31,000 for dependent undergraduate students, $57,500 for independent undergraduate students and $138,500 for graduate students.
  • Supported Direct Loans: Available to undergraduate students who demonstrate financial need, the interest due on these loans is paid by the Federal Government while you are in school and during future deferrals after graduation. The life loan limit is $23,000.
  • Grad PLUS Loans: These loans are designed for graduate students and professionals. They allow students to borrow up to the full cost of their education, but they also charge higher loan fees and a higher interest rate than unsubsidized direct loans.
  • Parental Plus Loans: The only federal loans available to parents, this option charges the highest interest rate of all federal student loans. They also have limited access to income-driven payment plans, with only one option instead of four.

Types of private student loans

Private student loan options can vary by lender, but you can generally choose a program based on your specific needs. Options may include:

More specialized loans for graduate programs may allow you to borrow more in aggregate, but they also charge higher interest rates than traditional undergraduate and graduate student loans.

What type of student loan is best for me?

Federal student loans are generally the best starting point for most college students and even parents, since they come with flexibility and protection that private lenders cannot match. However, there are a few reasons why you should choose to look for private student loans.

For example, if you run out of benefits from federal student loans, scholarships, grants, and work-study programs, you may still need special loans to fund the remainder of your education. And if you’re a graduate, student professional, or parent facing higher interest rates on federal loans, it might not hurt to shop and compare rates with various private lenders to determine if you can get better terms.

Ultimately, the best student loan has to do with your financial health, your borrowing needs, and how quickly you can expect to pay off the loan. If you can pay off your loan quickly and get a great interest rate, a private student loan may be best for you. If you want to take advantage of income-driven repayment plans, comprehensive deferment programs, and potential loan forgiveness, a federal student loan is the best option.

bottom line

Whether you’re a college student or a parent, federal and private student loans are available to help you pay for your or your child’s education. For the most part, it’s best to turn to federal student loans first to meet your financing needs. But there are some instances where it may be worth considering private loans.

Take the time to think about all of your options and how they might affect you now and in the future so you can make the best financial decision for you.

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