How Federal Student Loans Differ from Private Student Loans?

Last Update: May 22, 2020 College Students Loans

If you are in the market for a student loan, there are two types of loans which may be available for you. One is the federal student system, which is funded by the federal government, and the other is a private student loan which is funded by banks, credit union, or other financial institutions.

  • Federal loans offered by the government are based on your financial and family situation, which you have to provide by completing the Free Application for Federal Student Aid form (FAFSA).
  • Private student loans which are offered by banks and other financial institutions, are based on your credit profile. If you do not yet have a credit profile, then you need a co-signer who has a good credit score and record.

Private and federal student loans should be used to pay for your education expenses such as tuition, accommodation, personal needs, books, stationery, computers or electronics for college or school, and transportation.

The money should never be used for holidays, entertainment, or luxury goods that are not linked to your education.

When applying for a loan, always consider what you might have to pay back – and never borrow more than you think you will need.

The criteria for both require that you apply for a new every year you are in college, and you must be enrolled at least half-time – if a part time student.

Comparison Between Federal and Private Student Loans

Both have their merits, but many experts agree that you may get more benefits over time from a federal loan.

Here is a summary of how they compare.

    • Federal. You only start paying back your loan once you have graduated, leave school, or change your enrollment status to less than half-time.

Private. Many of the financial institutions require payments while you are still in school or college.

    • Federal. The interest rate is fixed and often much lower than private.

Private. This may have variable interest rates, and some could climb to greater than 18%, and though the rate sometimes drops, you could end up paying a lot more for your loan.

    • Federal. Undergraduates with financial need can apply for a subsidized loan where the government pays the interest while you are still in college, or at least half-time enrolled.

Private. They are not subsidized, so you pay the interest yourself.

    • Federal. You do not need a credit check for most federal loans. You will not need a co-signer for your loan if you have no credit record.

Private. Some of hem need a credit profile. If you do not yet have a credit record, you will need a co-signer with a good credit profile.

    • Federal. Interest may eventually be tax deductible.

Private. Interest may not be tax deductible.

    • Federal. If you get into difficulties repaying your it, you may be able to ask for a temporary postponement, or a possible recalculation for lower payments.

Private. Most of them do not offer postponement payment options.

    • Federal. They have a loan forgiveness program, where your loan, or a portion of it is written off, if you are employed in the public service sector.

Private. There is no chance that a private lender will offer a loan forgiveness program.

    • Federal. Interest rates are increased on 1st July each year, but this is for new loans only, not ones already in existence.

Private. This does not apply to private student loans, who may have different interest protocols.

These are the main differences between a federal student and private student loan. There is no cost to apply for a private or federal student loan, but there are different application criteria for each of them.

Paying back The Loan

Paying back your loan can take up to 10 years, or sometimes up to 20 years. The federal student loan process offers a program known as Public Service Loan Forgiveness, (PSLF) whereby the balance of your loan will be written off if you have paid 120 months under a payment qualifying plan.

However, you have to apply for this benefit, and you have to be employed in certain public service occupations, or in a non-profit organisation. If you are eligible and are approved, you can wave the balance of your student debt goodbye!

Under certain circumstances your federal debt may be discharged, if for example, you become permanently disabled, closure of the educational institution during the period of study, if someone has used identity theft to secure a loan in your name, or obviously if you die.

It is unlikely that a private loan debt will be discharged, especially if you have a co-signer who would be liable if you cannot pay.

Any way you look at it, whichever loan you decide on, is a big step – and a major decision for your future life.

Another Strategy to Save Interests

If you have a good job with a good income, and have built up a good credit score, you can refinance your student loan. This means taking out a loan with a private lender, usually at a lower rate, to pay off your federal student loan.

Borrowers have been to save about $18,000 by reducing the rates on their student loans by an average of 1.7 percentage points.

This information is according to experts in the market place of online lenders.

Find out all the ins-and-outs of any student loan you want to pursue, whether it be a federal or private.

It always pays to shop around for the best deals, especially with private financing.



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