If you or your child is getting ready to start college and you applied for financial aid, you’re probably aware that there are a number of financing options available to students. Both private and federal financing options can allow you to pay for your post-secondary education and the associated fees, such as tuition, books, and living expenses.
When you start looking into how to get a loan, it’s important to understand that there are major differences between federal and private student loans. While both types of borrowing can help you pay for your education, both will also have a different impact on your finances. We’ll break down each type of loan here so you can determine which one might be best for you.
Overview: Federal student loans vs. private loans
|Loan Type||Eligibility||Annual loan limit||Interest rate*|
|Direct Unsubsidized Loan||
||$5,500-$20,500 (Determined by your school)||
|Direct Subsidized Loan||
||$5,500-$20,500 (Determined by your school)||4.99%|
|Grad PLUS Loan||
||Cost of attendance, minus any other financial assistance||7.54%|
|Parent PLUS Loan||
||Cost of attendance, minus any other financial assistance||7.54%|
|Direct Consolidation Loan||
||Up to the amount of your current federal loans||Weighted average of interest rates on the loans being consolidated|
|Private student loans||Based on your credit profile and income||Varies by lender and creditworthiness||
|Refinanced loans||Based on your credit profile and income||Varies by lender and creditworthiness||
|*Interest rates for federal student loans disbursed between 7/1/22 and 7/1/23|
4 types of federal student loans
Federal student loans are made by the government, and Congress sets the interest rates each year — which, for federal student loans, always have a fixed rate. When you take out a federal student loan, the U.S. Department of Education is your lender.
To apply for financial aid, you’re required to complete and submit a Free Application for Federal Student Aid (FAFSA), which can be completed online. You also need to be a U.S. citizen or eligible noncitizen to qualify.
Federal student loans can provide a number of advantages to fund your schooling over private loans, such as lower fixed interest rates and affordable repayment plans based on your income. Federal student loans also typically don’t require repayment until after you graduate or leave school, and you don’t need to get a credit check to qualify for most types. Plus, you may be eligible to have a portion of your student loans forgiven if you meet certain requirements.
1. Direct Unsubsidized Loan
One of the most common types of loan the federal government offers are Direct Unsubsidized Loans. These are available to undergraduates and graduates, and it isn’t required that the student show financial need — meaning, they’re available even to students whose wealth exceeds a certain level.
When you take out an unsubsidized loan, you are responsible for paying the interest during the entire duration of the loan. If you choose not to pay interest while you’re in school, the interest will accrue and be added to the principal balance.
Direct Unsubsidized Loans are low-cost, fixed-rate loans. Your school will determine how much you’re eligible to receive each year, but one of the determining factors is if you’re a dependent or independent student. After you graduate, leave school, or drop below half-time enrollment, you will have a six-month grace period before you are required to begin repayment.
2. Direct Subsidized Loan
Direct Subsidized Loans are another type of federal loan, and, while similar in name, these loans are only available to undergraduate students with financial need. One of the main benefits of subsidized loans is that the government pays the interest while you’re in school, in your grace period, or if your payments are paused through deferment.
Your college will tell you whether you’re eligible for Direct Subsidized Loans and how much you can borrow. Just like unsubsidized loans, this will also vary depending on if you’re a dependent or independent student.
Direct Subsidized Loans have low fixed interest rates as well, but the real benefit comes with not having to pay the interest during the time from disbursement to repayment. This can save you a significant amount of money, but once you start repayment, the government stops paying the interest and you take over these payments. You’ll have the same six-month grace period after you graduate, leave school, or drop below half-time enrollment before having to begin payments on your loan.
3. PLUS loans
Federal Direct PLUS Loans are available to both graduate students and parents of undergrad students, and the amount you can borrow is the cost of attendance minus any other financial aid you receive. These loans have higher interest rates than subsidized and unsubsidized loans and they also come with a higher origination fee.
PLUS loans are also the only type of federal student debt that requires a credit check. Borrowers with an “adverse credit history” might have a harder time qualifying, but they can apply with a cosigner.
4. Direct Consolidation Loan
If you have multiple federal student loans, a Direct Consolidation Loan allows you to combine them into one fixed-rate loan. This interest rate is based on the average of the interest rates on all the loans being consolidated.
Consolidating your loans will give you a single monthly payment instead of multiple monthly payments, but it will often also increase the period of time you have to repay the loan. This can result in lower monthly payments, but could also result in paying more in interest if your repayment is stretched out over a longer period.
2 types of private student loans
Whereas federal loans are provided by the government, private student loans are offered by banks, credit unions, online lenders, and other private institutions. Interest rates on private loans are almost always higher than their federal counterpart and may be variable instead of fixed.
Credit scores are also a major factor when determining the terms of your loan. Students with poor credit or a thin credit history may need to apply with a cosigner to qualify for more attractive terms. For these reasons, private loans should usually only be considered if you’ve maxed out federal loan options.
When you apply for a private student loan, you’ll apply directly with the bank or lender. Since these loans aren’t backed by the government, there are usually fewer hardship protections if you can’t repay. Private loans also aren’t subsidized, so you’ll be responsible for paying the interest for the entire duration of the loan.
1. Private student loans
There are private student loans for undergraduates, graduates, and other students enrolled in an eligible school. There are also parent loans, taken out by a parent, relative, or other creditworthy individuals who want to take responsibility for financing their student’s education.
To find a lender for a private student loan, check with your school first to see if they have a list of lenders. If you find a lender on your own, make sure the lender works with your school of choice.
After you apply, the lender will review your creditworthiness and other factors before making you an offer. You can review the interest rate and loan terms you’re approved for before accepting the loan. Many (but not all) private lenders allow students to defer repayment until after graduation.
2. Refinanced student loans
Just as the government offers an option for refinancing federal student loans, many private lenders also offer options for refinancing student loans. You can often find refinancing loans with fixed and variable interest rates, and consolidating your private loans into one gives you just one payment to focus on.
Plus, refinancing your student loans can lower your interest rate if you have improved your credit since taking out your original loans. To refinance, you usually must have already graduated and your current student loans must be in good standing.
The bottom line
There are several options when it comes to paying for your education, but the differences between each type of loan are important to consider. Federal loans are generally going to be more affordable with better interest rates, and private loans should typically only be considered after federal loans are exhausted. Depending on your situation, you may be eligible for some loans and not for others.
Talk with someone from your school’s financial aid office if you have questions, as they’ll be able to give you the best information based on your financial aid profile. If you’re considering private loans, look for the most reputable lender that offers the best interest rates.
Disclaimer: All rates are accurate as of July 1, 2022.
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