The Difference Between Federal And Private Student Loans
January 21, 2021With average cost of college being north of $20,000 for a public in-state school, student loans have become a big part of how families pay for college. Most student loans are classified as either federal or private. Federal student loans are loans made or guaranteed by U.S. government and private loans are essentially non-federal student loans made through lenders such as banks, credit unions, state agencies or schools. There are important differences between these loan types and knowing the difference can help you make the most informed decision.
The main types of federal student loans are:
Direct Subsidized Loans – typically for undergraduate students with financial need. Student loan interest is paid by the government while the student is in school at least half-time, during the 6 month grace period after college and possibly if student loan payments are delayed.
Direct Unsubsidized Loans – can be used by undergraduate and graduate students regardless of financial need. Interest accrues while the students are in school, during the grace period and during any student loan payment delays and is added to the loan principal. You can pay the interest while you’re in school to mitigate this difference between direct and indirect if you are able.
Perkins Loans – low interest loans for undergraduate, graduate or professional students with financial needs.
Direct PLUS Loans – graduate or professional students and parents of dependent undergraduate students typically use this loan to pay for college. To qualify, the borrower must not have an adverse credit history and the student must be enrolled at least half time.
Federal loans typically offer more benefits than private loans such as:
- Lower interest rates, in general
- Loan forgiveness options based on public service employment, certain occupations or certain payment plans
- A variety of options to modify payments if you experience a hardship such as permanent disability or financial hardship
- Lack of credit checks, in general
However, these benefits also come with harsh consequences for default such as possible wage garnishments, difficulty discharging if you file for bankruptcy and even forfeited tax refunds and Social Security payments.
Private loans vary per lender, but typically private loans share these characteristics:
- Interest rates tend to be higher than most federal student loans
- Variety of interest rates and repayment periods
- Loan forgiveness programs are not available
- Fewer options if you find yourself going through a financial hardship. This varies per institution, so before getting a private loan ask about repayment programs if you experience a hardship
- Credit check and/or a co-signer may be needed to get loan
As long as your loans are classified as student loans, the interest you pay is eligible for deduction, and that’s true for both federal and private loans. The bottom line is that before you opt for any student loans, make sure you know the difference. Many students find themselves learning about the difference the hard way, once it’s too late to go back and find other ways to pay.