Federal vs. Private Student Loans

Updated on April 17, 2019

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Federal vs. Private Student Loans

If you need financial aid to pay for college, you’ll most likely have to take some form of student loans. When it comes to student loans, you’ll have two options: federal or private. While both provide an avenue to pay for school, there are some major differences between the two. This is mainly because federal student loans are funded by the government while private student loans are provided by institutions like banks, credit unions, and online lenders.

In order to know exactly what you’re signing up for with either student loan type, you’ll need to know a few more details. Let’s take a closer look at federal student loans first.

Federal Student Loans

Federal student loans are generally the best option for students. Because they are regulated by the government, federal student loans have many benefits that private loans do not. Such as interest rates that don’t change and flexible repayment plans. These benefits allow federal student loans to typically be less expensive than private ones over time.

Federal student loans are provided through the William D. Ford Federal Direct Loan Program and will come in three different types:

  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Direct PLUS Loans

We dive into the details of each specific loan type in our “Direct Subsidized vs. Unsubsidized Loans” and “ Direct Plus Loans” videos. So make sure you watch them after this.

In order to receive these loans, you’ll need to be enrolled in school at least half-time. Being at least a half-time student will also ensure you don’t have to make student loan payments until after you graduate. Although, if you drop below the credit hours of a half-time student or decide to leave school altogether, you will be required to start making student loan payments.

Whether your enrollment status changes or you graduate, you’ll most likely have a grace period before you’re required to start making payments. Typically, federal student loans have a six month grace period before you are required to start paying off the loan. This grace period will allow you some time to get your finances in order.

Another benefit of federal student loans is borrower-friendly repayment options. When it’s time to pay off your federal student loans, you’ll be able to choose from various plans that are flexible depending on your financial situation. Available repayment plans include:

  • Standard, Graduated, or Extended Repayment Plans
  • Income-Driven Repayment Plans
  • Deferment
  • Forebearance

We explain each repayment plan in our “Paying Your Student Loans” section of this playlist so make sure you check them out as well.

Private Student Loans

Now let’s take a closer look at your second option: private student loans. These loans are generally more expensive than federal ones and should only be considered after you’ve exhausted all federal student loans, grants, and work studies available to you.

Private student loans often cost students and families more in the long-run because they don’t offer the same benefits that federal loans do.

To even be eligible for a private student loan, you’ll likely need good credit and some form of income. Since most students don’t have either, someone with these qualities would typically need to cosign the loan for them. This would ultimately make both people responsible for repaying the student loan.

Also with private student loans, you typically won’t get the benefit of relatively low fixed interest-rates or flexible repayment plans. Most private lenders will offer loans with variable interest rates, meaning the interest rate can increase over time. Private lenders also tend to not offer income-driven repayment plans if you run into financial difficulties. Private student loans may also require you to make payments while you’re still in school.

While these reasons generally make federal student loans a better option for students and parents, there are a few cases where private student loans might be the better option. Private student loans can become an appealing alternative for graduate students and parents with high-credit scores, no need for income-driven repayment options, and no plan to pursue Public Service Loan Forgiveness. Borrowers with high credit scores can often get lower interest rates with private student loans. Private student loans also become attractive to students that run out of federal student loan options but still have more expenses to cover for school.

Takeaway

Ultimately, if you’re like most students and need loans to attend college, make sure you understand the details before you or your parents sign the dotted line on either a federal or private loan. While student loans provide you an opportunity to reach your educational goals, they can also damage your financial future if you borrow carelessly.