Private versus Federal Student Loans

What's the Difference between Private and Federal Student Loans?

The decision between a private and public student loan should be a fully informed one. It's important for borrowers, no matter their age, educational background, or lending experience, to have full insight into where they are obtaining debt.

Public (Federal) and Private student loans are both a key element to affording school or college, but both options have different details that need to be understood before you click that "apply" button.

WHAT ARE PRIVATE STUDENT LOANS?

Private student loans are not issued by the federal government. Instead, they are funded by other types of lenders such as banks and credit unions.

These alternative lenders have the choice of setting their own interest rates and underwriting criteria. For example, some alternative lenders forgo using a borrower's credit score to make an approval, such as educational criteria.

Alternative lenders can also tack on additional underwriting criteria on top of credit scores, which allows them to potentially change their rates depending on different details.

When can you use private student loans?

Private student loans can be used for traditional higher education (such as four-year colleges) as well as non-accredited and new forms of education, like technology bootcamps and certificate training programs. Additionally, if your federal aid package doesn't cover all of your financing needs, a private student loan can make up the difference.

WHAT ARE FEDERAL STUDENT LOANS?

Federal student loans account for the majority of student loans. They are issued by the Department of Education. When it comes to Federal Student Loans, interest rates are the same for every borrower.

Applications for this type of loan are completed by submitting a Free Application for Federal Student Aid (FAFSA) form.

When can you use federal student loans?

Federal student loans are given by the government. Schools that are designated as Title IV (of the Higher Education Act of 1965) are eligible to have federal student loans offered to their students.

SO... WHICH ONE SHOULD I PICK?

It's time to weigh the pros and cons.

REPAYMENT TERMS (A.K.A - how long is the loan for?)

For federal student loans, you don't need to start repayment until after you've graduated. If your loans are subsidized, you don't accrue interest while you're in school, nor during your grace period. Additionally, borrowers who work in certain industries (education and public service) may have the opportunity to have their federal loans forgiven after working for a long period of time.

With private student loans, students can benefit from non-standard repayment terms in addition to lower interest rates. For example, some private student loans have 20- or 25- year loan terms, which results in a lower monthly payment (but a much higher cost of borrowing in the long-term.) On the flip side, some private student loans can offer a much shorter loan term compared to the standard 10-year term of a federal education loan.

CONSEQUENCES OF DEFAULT

One should not apply for financing that they will not be able to pay back. Defaulting on a federal or private student loan is never a good thing, but different circumstances may arise after you've gone into default:

The federal government can garnish your wages without getting a court order. Your payments will start being reduced from your paycheck automatically. With a private student loan, the lender needs to get a court judgement before garnishing your paychecks.

EASE OF APPLICATION

Applying for a private student loan takes less time and information compared to a federal student loan. Federal student loans require a FAFSA form to be completed. For some private student loans, your application decision can be available in less than a day. Federal student loans take a bit longer.

Your financing determination should be a fully informed decision, and different circumstances call for different options. Before you apply for any time of loan, be sure to reach out to your educational institution to see what they recommend.

FURTHER READING