Even during a pandemic, many students are still choosing to take out student loans. There are currently 45 million student loan borrowers in the U.S.
If you’re considering going this route, plenty of research is integral to choosing the best student loans.
Students have two loan options: federal and private student loans. Which is the best option for you? Here is the difference between federal and private student loans.
Federal student loans are the most well-known types of student loans. But should you choose a private loan, instead?
To make this decision, you should have a basic understanding of private student loans. These are loans you get from a financial institution, usually a bank or a credit union.
Private loans are a great option because of their flexibility. You can use them for just about any expense, such as room and board, tuition, equipment, books, and more.
If you don’t know how to pay for college, the first thing you should do is decide if federal student loans or private loans are best for you.
When you take out a federal student loan, you’re borrowing money from the government to pay for your education. These have flat interest rates set by Congress. You’ll also have to pay origination fees.
When you take out a private student loan, you’re borrowing money from another organization. The interest rate depends on your credit score (if you have one) or your cosigner’s credit score.
Unlike federal student loans, private loans usually don’t charge an origination fee. However, federal student loans are more flexible than private loans. Federal loans offer alternative repayment options, borrower protections, and more. You also have forgiveness options with federal student loans, and not with private ones.
Here’s more information on these differences.
As stated previously, Congress sets the interest rates on federal student loans and they’re often low — much lower than a credit card. Not only that, but this rate is fixed. Your interest rate depends on when you apply for student loans.
With private student loans, the interest rate can be fixed or variable. Depending on your or your cosigner’s credit score and history, the interest rates could be higher or lower than the interest rate on federal student loans.
If you take out federal student loans, you won’t have to pay until you graduate from college or leave school. With private loans, it depends on your lender. Some require you to pay, and others may let you pay after you graduate.
You don’t need a credit check for a federal student loan, except for PLUS loans. Private student loans conduct credit checks. If you don’t have an established credit history, it’s recommended you have a co-signer.
If you need financial assistance, you may get a subsidized loan. This is where the government handles your interest payments while you’re still in school. Keep in mind, you must be in school at least part-time to qualify for a subsidized loan.
There are no subsidized private loans. You’re responsible for paying the interest on your loan.
Federal loans can be consolidated into a Direct Consolidation Loan. Private loans that don’t offer consolidation may not offer to refinance your loan.
You can deduct the interest on both private and federal loans when you file your taxes. Make sure you talk to a tax expert to get more information on this.
Federal loans offer different repayment plans. For example, a popular option is tying your monthly payment to your income. For private loans, every lender has different repayment options. Make sure you discover your options.
If you have trouble paying for college, you can temporarily postpone your loan or reduce your payments. For private loans, every lender has different rules on postponement and lowering payments.
If you get a job working for the government, you may qualify for loan forgiveness if you have a federal student loan. Many private lenders don’t offer loan forgiveness. However, if you got your loan from a state agency, you may be able to qualify for loan forgiveness.
Federal student loans have no prepayment penalties. Some private lenders may have prepayment penalties, so make sure you check with your lender before submitting your loan applications.
After reading the previous section, you can see there are many benefits of having a federal student loan. These include:
Federal student loans also cancel if you die or are permanently disabled, so you don’t need to worry about your loved ones paying off your debt.
The biggest drawback of taking out a federal student loan is most have borrowing limits. For example, undergraduates can’t borrow more than $57,500. In addition, they carry an origination fee — usually 1.057% (PLUS loans have a fee of 4.228%).
If you don’t pay off your loan and don’t pause or forgive your loan, federal debt collectors can bypass the court to garnish wages and/or seize tax refunds.
To apply for a student loan, you also need to apply for financial aid (FAFSA). This is to determine your financial need.
In addition, PLUS loans come with higher interest rates, stiff origination rates, and require a credit check. Graduate students and parents may want to look into a private loan before settling with a PLUS loan.
The biggest benefit of choosing a private student loan is you have more options.
That’s because private loans aren’t based on need the way federal loans are — they’re based on other factors such as income, credit, and other qualifications.
Because of this, you can take out a private student loan at any time. This is especially beneficial if you need additional financing, if you plan on attending graduate school, or if you don’t meet the FAFSA requirements.
There’s also no cap on how much you can borrow. Depending on your or your cosigner’s credit, you may get a lower interest rate.
The biggest drawback is you may not be saving money, especially if the federal rates are lower than your interest rates or if you opt for a variable interest rate. You also need a good credit score or a co-signer.
There are usually fewer forgiveness and repayment options, so you’re stuck if you can’t afford your payments.
Which is the best option for you, federal or private student loans? If you’re still unsure, use our website to enter your school name and compare your loan options.
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