In this free guide, we will be exploring the main differences between private and federal student loans. So this is the information you need to know about once you’ve decided to go or go back to college.
The university you want to enroll in will likely include student loans as part of your financial aid options. These options can either be federal or private student loans. Before we dive into the comparison between these two, you should at least know what they are.
Federal student loans are from the federal government or state, while private student loans are from private lenders. These private lenders can be the university itself, state agencies, banks, credit unions, or other private financial institutions.
Note: You should try federal student loans first before considering a private student loan. This suggestion will become more clear as we explore the differences between these two sources of student loans.
So what are the differences between a federal and a private student loan?
To make the differences between these types of student loans more distinct, I have used ten metrics for this comparison. These metrics are; When payment is due, interest rates, subsidies, credit check, consolidation and refinancing, Loan forgiveness, prepayment penalties, postponement options, repayment plans, and easy to get.
So let’s dive in and see how each metric is handled in federal and private student loans.
1. When is the Payment Due?
With federal student loans, the payment is due only in the following circumstances; after your graduation, if you drop out, or if you reduce your enrollment status to less than half the time.
But with private student loans, you have to start making payments while you are still in school. Some private student loan lenders could give you a pass for not making payments while still studying.
2. Interest Rates:
Federal student loans have fixed and much lower interest rates. The interest rate for undergraduate federal student loans is fixed at 3.73%, while for graduate studies is 5.28%. You can find out more about the interest rate at FederalStudentAid’s website.
The interest rates on Private student loans vary from lender to lender. The interest rate is usually between 6 to 10% depending on the lender and state law. You could also find interest rates that are lower than 6%, but it is rare.
With federal student loans, the government can pay at least half of the interest rates while studying. So after graduation, you might have a lower monthly payment amount to start repaying the loan. Another name for this type of loan is called subsidized loan.
On the other hand, you don’t have this benefit with private student loans. You are solely responsible for paying the entire interest on the loan. Another name for this student loan type is unsubsidized student loans.
4. Credit Check:
Federal student loans do not require a credit check before approval. The exception to the no credit checks is the PLUS student loan( Student loans for graduates and professionals). So if you are requesting student financial aid for any undergraduate studies, you don’t have to worry about your credit score.
But with Private Student Loans, the lender will pull your credit record from an established credit bureau. If you include a cosigner, their credit records will be checked accordingly. You could quickly get rejected for a private student loan if your credit score is terrible.
5. Consolidation and refinancing:
With federal student loans, you can combine multiple student loans into one single loan with a fixed interest rate. This type of loan is called Direct Consolidation Loan. Through a single loan, you can easily manage the repayment of the multiple loans you had.
With Private student loans, you cannot consolidate multiple loans into a single loan. But you could take another loan to refinance the first one you had.
6. Loan Forgiveness:
If you get employment in the public service, you could be eligible for partial loan forgiveness with federal student loans. In the best cases, all of your student loan debt could be canceled and wiped out by the government. Another scenario is the loan discharge which is when you can’t afford the repayment due to permanent disabilities or closure of the school where you got the loans.
It is rare to find loan forgiveness cases with private student loans. Although some state agencies might wipe off your debt in certain circumstances, the odds are not in your favor.
7. Prepayment Penalties:
There are no prepayment penalty fees with federal student loans. You can pay off the loan early if you can without having to pay any penalties.
With some private student loans, you will incur a penalty fee if you want to settle your debt early. Make sure you read the loan agreement’s fine print to know the exact terms and conditions you are binding yourself with.
8. Postponement Options:
Federal student loans are more flexible because you can temporarily postpone or lower your monthly repayments. At times, you might have trouble meeting up with your repayments. Federal student loans allow you to reschedule the loan repayment more comfortable manner.
Although some private student loan lenders will accept postponement, you should always check with the lender. Some lenders will accept repayment postponement, while others won’t.
9. Repayment Plan:
With Federal student loans, you get at least four repayment plan options. These plans are Revised Pay As You Earn Repayment Plan (REPAYE Plan), Pay As You Earn Repayment Plan (PAYE Plan), Income-Based Repayment Plan (IBR Plan), and Income-Contingent Repayment Plan (ICR Plan). To learn more about these plans, visit this resource on FederalStudentAid’s official website.
For private student loans, the repayment plans vary from lender to lender. There is no clear or fixed repayment plan. It would be best if you always asked the lender about the repayment options you have.
10. Easy to get:
Federal student loans are easier to get. Since the government wants a more educated population, they approve student loan applications without any credit checks. You can even qualify for a subsidized student loan from the federal government.
On the other hand, private student loans are tough to obtain since the lenders conduct a hard check on your credit history from the credit bureau. Some private student loan lenders are picky about the study program they are willing to finance.
So which one is better? Federal Student Loans or Private Student Loans? In my opinion, Federal student loans should be your best option unless you can’t get the loan for some reason. You can apply for a Federal Student Loan on the FederalStudentAid application section.
If you decide on a private student loan, make sure you compare different offers to get the lowest interest rates and loan terms. To read more about student loans in general, you should check out this free resource.