federal vs. private student loans

student loans

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what's in this lesson?

There are two types of student loans to choose from — and there are pros & cons to each. In this lesson, we’ll dive a little deeper to talk about federal student loans and private student loans, how they work, and how to pick the student loan best for you.

federal vs. private student loans

student loans

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  • Overview
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federal vs. private student loans

student loans

There are two types of student loans to choose from — and there are pros & cons to each. In this lesson, we’ll dive a little deeper to talk about federal student loans and private student loans, how they work, and how to pick the student loan best for you.

What is a federal student loan?

 

A federal student loan is made by the federal government with terms and conditions set by law. Congress actually sets the interest rates on these loans each year. 

 

There are many benefits to choosing a federal student loan including:

 

  • Nearly anyone is eligible! Most federal loans don’t require a good credit score or a co-signer. Almost every student with a high school diploma is eligible to receive them.

 

  • There are postponement and repayment options. If you have trouble making payments after graduation while you’re job searching, you can temporarily postpone or lower your payments. You can also take advantage of the many different repayment plans offered once you find work, like tying the amount of your monthly payment to your income. 
  • The government offers subsidized loans. If you qualify financially, the government will actually pay interest on a subsidized loan while you’re in school. You will still be responsible for the principal of the loan, but the government pays for your interest. 
  • Payments aren’t due until after you graduate, leave school, or change your enrollment status to less than part time. In other words, you don’t have to pay back the government while you’re cramming for finals at the end of every semester. While payments aren’t necessarily due while you are still in school, you might still be responsible for paying the interest accrued during that period on unsubsidized loans.  
  • Loan forgiveness. This means that you might be eligible to have some portion of your loans forgiven—or go bye-bye, like seriously, you don’t have to pay them back anymore—if you work in public service. Some jobs that offer loan forgiveness include becoming a nurse, teacher, or working for the Peace Corps. 
  • And finally, the interest rate is fixed. This keeps your payments steady and predictable. Plus, federal interest rates are often lower than private student loans. 

 

To apply for federal student loans, you’ll need to file a FAFSA, the Free Application for Federal Student Aid. To learn more about FAFSA and the types of federal student loans, be sure to check out studentaid.gov

 

What are private student loans?

 

Whereas federal student loans are issued by the government, private student loans are issued by a credit union, bank, a state loan agency, or a financial institution. 

 

One difference between private and federal student loans is the interest rate. Private student loans can come with fixed or variable interest rates, whereas federal loans only come with fixed interest rates. A variable interest rate fluctuates over time, meaning your payment amounts will fluctuate too.  

 

Another difference is that most private loans aren’t subsidized. That means as soon as you borrow the money, the loan will begin accruing interest. 

 

The last big difference is the application process. Instead of filling out the FAFSA, you have to apply directly with the lender. You’ll also most likely need a co-signer. Reminder: A co-signer is a parent, close family member, or friend who agrees to pay the loan if you do not. In other words, someone that you should be extra nice to during this whole process. 

 

How to choose the best student loans for you.

 

One thing to keep in mind is that undergraduates can borrow only up to $31,000 in subsidized and unsubsidized federal loans throughout college if they are considered financially dependent on their parents or $57,000 if they are considered financially independent. 

 

That might mean you will need both federal and private student loans depending on the cost of your tuition. And hey, that’s okay! 

 

There’s no wrong choice, or combination of choices, if you know what you’re getting into. Remember that, generally, federal student loans have more borrower benefits and lower interest rates so it might be wise to explore all your options on that route before supplementing them with private loans.

 

The more you familiarize yourself with the differences between federal and private student loans, the less intimidating the borrowing process becomes!

 

what's in this lesson?

There are two types of student loans to choose from — and there are pros & cons to each. In this lesson, we’ll dive a little deeper to talk about federal student loans and private student loans, how they work, and how to pick the student loan best for you.

Transcript

What is a federal student loan?

 

A federal student loan is made by the federal government with terms and conditions set by law. Congress actually sets the interest rates on these loans each year. 

 

There are many benefits to choosing a federal student loan including:

 

  • Nearly anyone is eligible! Most federal loans don’t require a good credit score or a co-signer. Almost every student with a high school diploma is eligible to receive them.

 

  • There are postponement and repayment options. If you have trouble making payments after graduation while you’re job searching, you can temporarily postpone or lower your payments. You can also take advantage of the many different repayment plans offered once you find work, like tying the amount of your monthly payment to your income. 
  • The government offers subsidized loans. If you qualify financially, the government will actually pay interest on a subsidized loan while you’re in school. You will still be responsible for the principal of the loan, but the government pays for your interest. 
  • Payments aren’t due until after you graduate, leave school, or change your enrollment status to less than part time. In other words, you don’t have to pay back the government while you’re cramming for finals at the end of every semester. While payments aren’t necessarily due while you are still in school, you might still be responsible for paying the interest accrued during that period on unsubsidized loans.  
  • Loan forgiveness. This means that you might be eligible to have some portion of your loans forgiven—or go bye-bye, like seriously, you don’t have to pay them back anymore—if you work in public service. Some jobs that offer loan forgiveness include becoming a nurse, teacher, or working for the Peace Corps. 
  • And finally, the interest rate is fixed. This keeps your payments steady and predictable. Plus, federal interest rates are often lower than private student loans. 

 

To apply for federal student loans, you’ll need to file a FAFSA, the Free Application for Federal Student Aid. To learn more about FAFSA and the types of federal student loans, be sure to check out studentaid.gov

 

What are private student loans?

 

Whereas federal student loans are issued by the government, private student loans are issued by a credit union, bank, a state loan agency, or a financial institution. 

 

One difference between private and federal student loans is the interest rate. Private student loans can come with fixed or variable interest rates, whereas federal loans only come with fixed interest rates. A variable interest rate fluctuates over time, meaning your payment amounts will fluctuate too.  

 

Another difference is that most private loans aren’t subsidized. That means as soon as you borrow the money, the loan will begin accruing interest. 

 

The last big difference is the application process. Instead of filling out the FAFSA, you have to apply directly with the lender. You’ll also most likely need a co-signer. Reminder: A co-signer is a parent, close family member, or friend who agrees to pay the loan if you do not. In other words, someone that you should be extra nice to during this whole process. 

 

How to choose the best student loans for you.

 

One thing to keep in mind is that undergraduates can borrow only up to $31,000 in subsidized and unsubsidized federal loans throughout college if they are considered financially dependent on their parents or $57,000 if they are considered financially independent. 

 

That might mean you will need both federal and private student loans depending on the cost of your tuition. And hey, that’s okay! 

 

There’s no wrong choice, or combination of choices, if you know what you’re getting into. Remember that, generally, federal student loans have more borrower benefits and lower interest rates so it might be wise to explore all your options on that route before supplementing them with private loans.

 

The more you familiarize yourself with the differences between federal and private student loans, the less intimidating the borrowing process becomes!

 

Additional Resources

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