COLLEGEBUDGETING

Comparing Federal and Private Student Loans

Everyone talks about applying for financial aid through the Free Application for Federal Student Aid (FAFSA), but there isn’t a lot of discussion about private student loans. When you complete the FAFSA, you are automatically considered for a lot of scholarships, grants, and federal student loan options. Decisions for federal student aid are generally based on your academic record and your financial need. When you near the time to attend college, private student loan offers often come flooding in to you or your family. Let’s explore some of the differences between federal and private loans.

Federal loans

Federal student loans are provided by the federal government and have legally established terms and conditions. Terms like the interest rates and repayment options must be voted on and will be the same for any student attending a school in the United States, regardless of credit history or loan amount. While individual loan types can vary in the way interest is charged, many loan benefits apply to all types of federal loans. Some examples include:

• Payments are not required until 6 months after graduation or when a student drops below half-time enrollment.
• Interest rates are fixed, meaning they won’t change when the economy shifts.
• Some loans qualify for subsidized interest, meaning the government pays the interest while the loans are deferred. These loans are granted based on financial need.
• Students are not required to have credit established to qualify for Stafford Loans. Direct PLUS and Parent PLUS loans require credit or a cosigner, but do not base interest rates on credit history.
• Loans are eligible for deferment or forbearance under select circumstances, meaning you may stop or reduce payments for a period of time.
• Repayment options include an income-driven repayment plan, which allows you base your monthly payment on what you can afford to pay.
• Federal loan forgiveness programs allow graduates in some professions to have their student loans forgiven after a specified period of time.

Private loans

Private student loans are those offered by credit unions, banks, financial companies, or state organizations. Some private lenders will allow terms such as deferred payments while you’re in school, but others will require that payments begin immediately. Here are some other potential differences from federal loans.

• Interest rates may be fixed or variable. A variable rate means that the amount of interest you are charged can change after you’ve taken the loan. Variable rates are based on economic conditions.
• Most private loans require an established credit history or a cosigner to qualify. The assigned interest rate is generally based on the credit scores of the applicants.
• Private loans generally won’t offer any subsidized loan options, meaning you’re on the hook for all of the interest charged from the date the loan is initiated.
• Private loans typically won’t offer options to delay payments through deferral or forbearance if you have life changes such as periods of unemployment or attending graduate school.
• Loan forgiveness is rare for private loans. Professions that offer loan forgiveness generally only apply to outstanding federal student loans.

The bottom line

Always consider all of your options for paying for school. Avoid making a hasty decision, just because something seems easier in the moment. In many cases, federal student loans offer the best perks, the most flexibility, and the lowest interest rates; however, that doesn’t exclude the possibility of a private lender offering a lower interest rate or better terms. It’s important to consider all of the above factors before making a decision about the best option for you. If you have concerns, your college’s financial aid department is always a good first stop to get advice and information about your options.