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Student Loan Options: Federal vs. Private

//Student Loan Options: Federal vs. Private

When applying for financial aid through your university, your school will likely include student loans as part of your financial aid package.
It is important that you understand the different types of loans offered so that you can make the best decision regarding what type works best for you.
Generally, there are two types of student loans – federal and private.
Regardless of the type you choose, one thing is common: you have to pay back the money you borrow, plus interest, whether you graduate or not.

Federal Student Loans

Federal student loans are administered by the United States Department of Education.
The terms of your federal loans are set by the federal government, and these loans come with quite a few benefits typically not available with private loans.
Types of Federal Loans
There are three types of federal loans for college, all available under the William D. Ford Federal Direct Loan Program: Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans.
To qualify for any of these federal loans, you must be enrolled at least part-time in participating schools.
Direct Subsidized Loans are made only to undergraduate or vocational students who demonstrate financial need to help cover the costs of higher education.
Direct Unsubsidized Loans are made to undergraduate, vocational, graduate, and professional students, but unlike the Direct Subsidized Loans, eligibility is not based on financial need.
Direct PLUS Loans are made to graduate or professional students (as of July 1, 2006) and also to parents of dependent undergraduate students to help pay for education expenses not covered by other financial aid.
Eligibility for PLUS Loans is not based on financial need, but a credit check is required.
Borrowers with an adverse credit history must meet additional requirements to qualify for approval for a PLUS Loan.
Lending Cap on Federal Loans
Wondering how much money you can borrow in federal student loans?
That depends on whether you are an undergraduate, graduate or professional student, or a parent.
If you are an undergraduate student, the maximum amount you can borrow in Direct Subsidized and Unsubsidized Loans each year in ranges from $5,500 to $12,500.
The amount you are allowed to borrow depends on what year you are in school and your dependency status.
If you are a graduate or professional student, you may borrow up to $20,500 each year in Direct Unsubsidized Loans.
Direct PLUS Loans can also be used in combination with the $20,500 in Direct Unsubsidized Loans to cover the rest of your college costs not covered by other financial aid.
Finally, if you are a parent of a dependent undergraduate student, you can receive a Direct PLUS Loan for the amount of your child’s college costs that are not covered by their own financial aid.
Remember – you can borrow less than the full amount of federal loans your school offers in your financial aid package and can request more funds later if necessary.
Benefits of Federal Student Loans
The interest amount on federal student loans is a fixed rate and is typically less the interest rate offered by private lenders.
A lower interest rate can save you thousands upon thousands down the road when it comes time to repay your student loans, so the lower the interest rate, the better.
You will not need a cosigner or a credit check to get most federal student loans, with the except of the Direct PLUS Loan, which as mentioned previously, does require a credit check.
This means that most federal student loans are available to all individuals, regardless of your credit history.
Even those with a poor credit history will be eligible for most federal loans, allowing everyone a chance at a secondary education regardless of any financial issues they may have encountered in their past.
Further, most federal student loans offer flexible repayment options as well as options to postpone your monthly payments if you are having trouble making your payments.
These options include Income-Driven Repayment Plans where the amount of your monthly payment is based on your salary after graduating college and exiting your grace period.
A major perk of federal student loans is the potential to be eligible for loan forgiveness if you work in certain jobs.
Particularly, if you are a teacher or work in public service, you may be eligible for forgiveness of your student loans if you meet certain requirements.

Private Student Loans

Private student loans can help you pay for college after you have exhausted all other options, such as scholarships, grants and federal student loans.
These loans are made by a non-federal lender, such as a bank or a credit union.
The terms of a private student loan are set by the specific lender, and not by the federal government.
Generally speaking, private loans have higher interest rates and are therefore more expensive than federal student loans, so it’s best to use federal loans first before resorting to a private loan.
When Are Payments Due on Private Loans?
Typically private lenders require borrowers to make payments on their loans while still in school – there is generally no grace period.
Some lenders, however, do allow you to defer (put off) payments while in school.
Credit Checks & Cosigners
In contrast to federal student loans, most private lenders will require a credit check in order to receive a student loan.
Lenders are typically looking for someone with an established, positive credit history; thus, if you have had credit issues in the past, a private loan may not be an option for you.
A cosigner may also be required on a private loan, especially if you don’t have the best credit history.
Repayment Options
Perhaps one of the biggest downsides to private student loans is the lack of repayment options available to borrowers.
Most private lenders do not offer any type of repayment plans based on your income level, so you may face a steep monthly payment even if you have a job with a low salary post-graduation.
Further, most private lenders do not offer any type of loan forgiveness programs.
Therefore, if you work in a field where you could be eligible for loan forgiveness, it is especially important that all of your student loans are federal loans.
Regardless of whether you decide to pursue federal or private student loans, only borrow the amount you truly need to avoid racking up unnecessary debt you’ll have to pay back later.

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