Private Loans Versus Federal Loans: the Best Choices

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The different types of student loan

As with all types of loans, there are various categories that must be considered if you are to find the right kind of loan to suit your situation. With student loans this is no different: considering the young age of those who are applying for the loan, it is even more important to seek out advice and look at various paths before making a decision. While students may differ in terms of background, financial support and of course ability, there are two general options available to all: federal student loans and private student loans. This article will look at these two options and the fine grey area between the two, weighing up the pros and cons of each so as to better aid you in your application for a student loan.

“Considering the young age of those who are applying for the loan, it is even more important to seek out advice and look at various paths before making a decision.”

What is a federal student loan?

Federal student loans are those sponsored by the government, meaning that they are backed by the U.S. Department of Education. These can be subsidized or unsubsidized, with no interest accruing on the former while students are still in school. Such loans may be offered as part of a larger financial aid package, including other elements such as grants, scholarships or student work. Federal student loans used to come in the form of direct loans and guaranteed loans – those funded by the government and those held by private lenders – but these were abolished in 2010. Federal loans are generally less expensive and normally have lower, fixed interest rates and more convenient repayment terms than private student loans.

 

What is a private student loan?

The alternative to federal student loans, or those provided by the government, are private student loans. These are not subsidized, and are instead made to a student by a lender such as a bank or credit union. Private student loans can also be obtained as a supplement to a federally guaranteed loan – Stafford, Perkins or PLUS loans, for example. The main feature of a private student loan is that they are guaranteed by the financial institution, which is who decides the rates. As such, interest rates on private student loans are generally higher than the federal alternative. They will also often require the parents to commit to paying back the money if the student is ultimately unable to.

federal X private

What are the differences between the two? Which is the best choice?

So, which of these two options is best for you? Well, to begin with, it is worth researching the typical requirements associated with each. Many may not qualify for one, leaving them no choice but to apply for the other; each can benefit a student significantly depending on their situation, therefore studying every option is important. Below are the various key features of each, including both benefits and drawbacks.

The key features of federal student loans:

  • Are guaranteed by the federal government therefore offer interest rates that are generally more favorable.
  • The rate offered is also fixed, meaning that they are not subject to inflation and make it much easier to budget.
  • Are not tied to formal credit evaluations, making them accessible to all. Students will qualify regardless of their credit rating and that of their parents.
  • They offer flexible repayment schemes that allow for the many eventualities, such as income-based plans that relate repayment to money earned.
  • deferment and loan consolidation are also options, which allow students to postpone repayment due to mitigating circumstances.

The key features of private student loans:

  • Are generally more expensive, mainly due to their higher interest rates that may also be subject to inflation over the course of the loan’s life.
  • Will often require repayments while the student is still at school and before the student has started earning, unlike many federal loans.
  • Are not subsidized, meaning that no one is responsible for paying interest on the loan but the borrower.
  • You may need a cosigner to apply for a private student loan, whereas this is not typically the case with federal loans.

As college tuition costs continue to rise, more students are in need of student loans to help fund the gap between financial aid and college expenses. College bound students should choose a student loan that best fits their needs.

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