Federal Student Loans vs. Private Loans

"Federal Student Loans vs. Private Loans" submitted by SchoolGrantsfor Editorial Team and last updated on Monday 9th January 2012

Federal Student Loans (loans from the government or guaranteed by the government) Private Student Loans (non-federal loans from a bank, credit union, or other financial institution)
Available on both need and non-need basis (Subsidized and Unsubsidized Stafford Loans). A credit check is not required. Borrower must complete the Free Application for Federal Student Aid. You must be a U.S. citizen or permanent resident, full- or half-time undergraduate or graduate student. Based on credit criteria established by lender. Credit qualification criteria vary by whether the loan is backed by a co-signer. Individual must be:
  • Enrolled at least half-time at a 4- or 5-year college or university (approved by the U.S Education Dept.).
  • Age of majority in your permanent state of resident (in most states it's 18).
  • Working on your undergraduate or graduate degree.
  • No income requirement. Co-signers do not have to provide proof of income
  • Approval rate of more than 80%
You will not have to start repaying your federal student loans until you graduate, leave school, or change your enrollment status to less than half-time. Many private student loans require payments while you are still in school.
The interest rate on Stafford Loans is fixed, currently at 6.0 percent for subsidized loans for undergraduate students and 6.8 percent for unsubsidized loans for undergraduate and graduate students, and almost always lower than on a private loan—and much lower than on a credit card! Private student loans can have variable interest rates greater than 18 percent.
Set by federal formula. Noncredit based. Variable interest rate, reset annually, capped at 8.25%. Currently 4.7% in school, in deferment status, or in grace period; 5.3% in repayment. Set by lender. Credit-based. Interest rates vary based on credit history. Lowest pricing is available when both the student borrower and a co-signer are credit-approved. Variable interest rate, reset monthly. Based on the prime rate and will change monthly if the prime changes. Starts as low as prime -0.25% and goes to prime + 6%.
Students with greater financial need might qualify for a subsidized loan. The government pays the interest on subsidized loans while a borrower is enrolled in school at least half-time and during certain other periods. Private student loans are not subsidized. No one pays the interest on your loan but you.
You don’t need to pass a credit check to get a federal student loan (except for PLUS Loans). Federal student loans help you establish a good credit record. Private student loans may require an established credit record. The cost of a private student loan depends on your credit score, which you may not yet have as a student.
You don’t need a co-signer to get a federal student loan. You may need a co-signer to get the best possible deal.
Free help is available at 1-800-4-FED-AID. You need to find out if there is free help.
Some interest is tax deductible. Interest may not be tax deductible.
Loans can be consolidated into the Direct or FFEL Consolidation programs which have favorable repayment plans and other benefits. See http://www.loanconsolidation.ed.gov/for more information for Direct Consolidation Loans. For FFEL Consolidation Loans contact your lender. Private student loans can’t be consolidated into a federal loan consolidation program. They can only be consolidated into a private bank loan, if available. Nevertheless, private student loan should be only used when there is no option left. You should be very cautious while borrowing money from the lender, as you will have to pay it back with interest.
While the application process may be easier in some instances, federal student loans usually have lower interest rates and better repayment terms and options than private student loans. Additionally, schools use the information provided on the FAFSA to determine eligibility for other types of financial aid provided by the federal government, from your state, or from the school itself. This aid can include grants, scholarships and work opportunities. Consolidation loans allow student or parent borrowers to combine multiple federal student loans into one loan with one monthly payment. A federal consolidation loan cannot include private loans. However, some private lenders may offer consolidation loans. Borrowers should be aware that they will lose their federal borrower benefits if they consolidate their federal student loan into a private consolidation loan. Borrowers should always exhaust federal student loan options first before considering a private consolidation loan.
About 70% of parent and graduate/professional student borrowers will qualify for a PLUS loan. The adverse credit history requirement is not as stringent as the criteria used for private student loans. Subprime borrowers (borrowers with FICO scores under 650) will generally not qualify for most private student loans. Note that PLUS loans and unsubsidized Stafford loans are available without regard to financial need.
Loan limits set by Congress: Year 1: $2,625 Year 2: $3,500 Years 3 & 4: $5,500 Graduate $8,500 Individuals may borrow up to the cost of attendance less any other financial aid received. Borrower's school must certify the requested loan amount. Maximum aggregate loan limit (including all student loan debt, federal and private) is $100,000 without a co-signer. There is no aggregate loan limit when the individual borrowers with a co-signer.
For repayment borrower doesn't have to make payments while enrolled more than half-time. Borrower has six-month grace period after leaving school and before payments begin. Standard 10-year repayment term. Variety of repayment plans, including extended repayment of up to 25 years for those with $30,000 in student loan debt. Federal loan consolidation is an option. For repayment borrower doesn't have to make payments while enrolled more than half-time. Borrower has six-month grace period after leaving school and before payments begin. Standard repayment term is 15 years. Variety of repayment plans, including opportunity to extend repayment term as follows: 1.If the aggregate student loan balance is $20,000 to $40,000, individual can extend repayment term up to 20 years; $40,000 and higher, individual can extend repayment term up to 25 years. 2. Loans not eligible for federal loan consolidation. Combined billing available for convenience of making single payment.
If one defaults on a federal education loan, the government can garnish wages and social security payments, and attach income tax refunds. Student loans are generally not dis-chargeable in bankruptcy. On the other hand, if you default on a home equity loan or line of credit, the lender can take your home.
3% Origination fee. 1% Guarantee fee. A repayment fee (3%) may apply to some credit tiers

The ability to choose from a range of repayment plans is one of the advantages of taking out a federal student loan versus a private loan. However, borrowers who already feel challenged by managing multiple loans being serviced by different entities may see it as more of a burden than a benefit.

Be aware that, although most federal student loans have a six-month grace period before entering repayment, consolidation loans do not. Once your consolidation loan is approved, your monthly payments will begin within 60 days. If you need the grace period to look for employment, you may consider waiting until some of your grace period elapses before applying for consolidation.

Private loans from banks, colleges or family members cannot be consolidated. Alternative loan consolidation options are available through private lenders but may not include the same benefits or repayment options as federal Consolidation loans. (If you have HEAL loans, you may wish to consider refinancing rather than consolidating them. To learn more, visit the U.S. Department of Health and Human Services’ Web site at http://www.hrsa.gov./

If you can’t get enough free money to pay for college and you aren’t able to cover your costs with savings or other resources, there are federal student loans. Your loan’s low interest rate is fixed and you’ll usually have up to 10 years to repay, along with other benefits. You can get a federal loan even if you don’t have financial need, and there’s no credit check. There are also federal loans for parents.

Many lenders offer private loans if you have reached the federal loan borrowing limits, but keep in mind private loans usually have higher interest rates and fewer benefits. If you need to borrow, you should always take out federal loans first.

Most federal loans are eligible for FFEL Program consolidation, including:

The EdFund Student Loan Calculator can help students simply and quickly learn which repayment option is best for them. With its ability to compare all the available federal student loan repayment plans, including the income-based and income-contingent repayment plans, borrowers can make truly informed choices.

How to access your federal loan information:
1. Apply for a personal identification number, or PIN, from the U.S. Department of Education, if you don’t already have one. Go to www.pin.ed.gov. You’ll receive your PIN in a matter of days.

2. Go to www.nslds.ed.gov after receiving your PIN and click on the Financial Aid Review button. You’ll need to provide your Social Security number, the first two letters of your last name, your date of birth and your PIN.

Review your student loan information. You’ll see a listing of your federal student loans with the amounts, dates of origination and outstanding balances. To view detailed information about each loan, including the interest rate, click on the number next to each loan.

If you need information on your loans, you can access the National Student Loan Data System, the U.S Department of Education’s central database for all federal student aid records. (Keep in mind that any private loans will not be listed here, nor will HEAL and other Health Professions loans, but you will still want to include them on the worksheet under ineligible loans.

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