Difference Between Federal and Private Student Loans

Difference Between Federal and Private Student Loans

If you’re applying for college, you’re probably wondering how you’re going to pay for your tuition. With the current costs of even the least expensive community colleges in the country, you know that you’re going to need to apply for student loans. But where do you start?

To begin with, you need to know the difference between federal and private student loans. You need to know what each can do for you and how to apply for them. Fortunately, this information is not nearly as complicated as it seems. Let’s start with federal student loans…

Federal Student Loans

First of all, there are three types of federal student loans: direct subsidized or unsubsidized loans, PLUS loans, and Perkins loans. All of these are provided by the federal government and are offered to students based on financial need.

Direct Subsidized and Unsubsidized Loans – These are also called Stafford loans, and they are given directly to students based on their financial need. Subsidized loans do not accrue interest during your college years or during the grace period (six months) between graduation and your first loan payment.

PLUS Loans – PLUS loans are awarded to students pursuing graduate or professional-level degrees. They may also be awarded to parents who have dependent children pursuing undergraduate degrees. PLUS loans are capped at the cost of the student’s attendance after any other financial aid.

Perkins Loans – If you are an undergraduate, graduate, or professional-level student, and you can demonstrate exceptional financial need, you may be eligible for a Perkins Loan. Not all schools participate in this type of loan, as the school is actually the lender (instead of the federal government). This is the only kind of federal loan not directly funded by the federal government.

Private Student Loans

Now that you have an idea of the different types of federal student loans, let’s move on to private student loans to note the difference between federal and private student loans. Basically, private student loans are any loans that are funded by private institutions like banks, credit unions, schools, and/or state agencies. Though their interest rates are usually lower than other types of loans, these vary a great deal from one lender to another.

Major Difference Between Federal and Private Student Loans

The biggest difference between federal and private student loans, aside from the interest rates, is when you have to start paying them back. You won’t be required to pay your federal student loans back until six months after you graduate (or leave) school or cut your enrollment down to less than half-time. A lot of private lenders actually require you to start paying their loans back while you are still in school. Other differences include:

  • Private lenders do not offer subsidized loans, even to students in extreme financial need.
  • Most students will not need anyone to co-sign on a federal student loan with them, but most private loans require a co-signer.
  • The cost and interest rates for private loans are based on your credit score and the credit score of your co-signer. Federal student loans (with the exception of PLUS loans) do not require a credit check, and interest rates are fixed, no matter how good or bad your credit history is.
  • The interest on your federal student loans is almost always tax deductible, but this is not always the case with private student loans.
  • It’s much easier to temporarily postpone payments on federal loans when you are in financial hardship than it is with private loans.
  • With several options for repayment plans, you can often tie your monthly payment on federal loans to your current income, which is not an option for private loans.
  • Working in public service can sometimes afford you the option for loan forgiveness with federal student loans. Again, this is not an option with private loans.

In general, if you have sufficient financial need, federal student loans give you a lot more benefits than private student loans. That said, federal loans do not always cover the full costs of tuition, room and board, and other fees that you’ll encounter during your college career.

Fill Out a FAFSA to Find Out How Much Assistance You Qualify For

To find out if you qualify for enough federal financial aid to cover the costs of your education, you’ll need to fill out a Free Application for Federal Student Aid. Based on your income and tax information, as well as that of your parents or guardians (if you are a dependent student), the federal government will determine your financial need and how much assistance you qualify for.

By filling out a FAFSA, you’ll also find out if you qualify for any need-based government grants to help cover your tuition and fees. With as many benefits as you can get from federal student loans, this is the best place to start when looking for loans to pay for your education. You may only need a small private loan to cover the difference, and you’ll find repayment much easier than if you chose to only apply for private loans.

Compare and Apply for Student Loans TuitionChart.com

TuitionChart.com works hand-in-hand with the best, most trusted names in private student lending to help students and their families find the money they need for college. Through use of comparison tools and loan searches, TuitionChart provides over 20 different loan options for students. TuitionChart.com is designed to help students and their families wend their way through the maze of financial aid information.