Paycheck Chronicles

Federal Or Private Student Loans-What's The Difference?

college books, graduation cap, money

We all know that college is expensive for you and your family, but what if you aren't eligible for the GI Bill, a genius or athlete who can get scholarships, or wealthy - how do you pay for college?

Well, over 60 percent of students resort to student loans.

You may be aware that you can get student loans that are guaranteed by the Federal Government, you may not know that if you don't qualify for federal student loans there is another option available - private student loans.

Private student loans are made by banks, credit unions, state agencies, or schools.

While private student loans are usually not as good of a deal as federal student loans there may be times when they are a better deal.

    Which Type Of Student Loan Should You Get?

    If you apply for financial aid, your school will likely include student loans as part of your financial aid package. This is important, colleges can be slicker than used car salesmen when it comes to quoting you the true price of an education.

    The "list price" of college may be $25,000/year, but schools usually advertise that "75% of our students qualify for financial aid". This financial aid may be anything including Pell Grants, the GI Bill, scholarships, or student loans. Shop wisely.

    Federal Student Loans

    There are three types of federal loans for college:

    • Direct subsidized loans
    • Direct unsubsidized loans
    • Direct PLUS loans

    Generally, federal loans provide more flexibility than private student loans:

    • You don’t need a credit check.
    • Some federal student loans offer income-driven repayment plans, the repayment amount is based on the borrower’s salary after college.
    • Federal student loans usually allow you to change their repayment plan at any time.

    For these reasons, most students apply for federal student loans first, then look to private student loans to get the rest of the money they need for college. Federal loans can be limited by the parent's income and other factors.

    Private Student Loans

    Private loans can help you pay for college after you’ve explored scholarships, grants, and federal student loans.The differences between federal and private student loans include:

    • Private student loans usually offer the choice of a fixed or variable interest rate. A variable interest rate may be less than a fixed interest rate, which could result in a lower total student loan cost.
    • Private student loans offer different repayment plans—including options that allow you to make interest-only or fixed payments while you’re in school. These in-school payments could lower your total student loan cost.
    • Private student loans may have higher limits.
    • Private student loans are not limited to those with financial need.
    • Private student loans offer flexibility, since they can be taken out by a student, parent, relative, or spouse.

    Paying Back Student Loans

    Whether you choose federal student loans or private student loans, you have to pay back the money you borrow, plus interest—whether you graduate or not. This is, of course, the hardest part of getting a loan. In 2014, the most recent year for which data is available over 11.5 percent of those with federal student loans defaulted on them, only 2.4 percent of those with private student loans were in default.

    If you're having problems with federal student loan debt you should check out our page How to Choose the Best Federal Student Loan Repayment Plan.

    Also, check out this helpful page explaining your options for repaying private student loan debt. 

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