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Federal vs. Private Student Loans – What’s the Difference?

We all know college is dear to you and your family, but what if you’re not GI Bill eligible, a genius or an athlete who can get scholarships, or a rich – how are you paying for college?

Well, over 60 percent of students use student loans.

You may be aware that you can get federally guaranteed student loans, you may not be aware that if you do not qualify for federal student loans, there is another option available – private student loans.

Private student loans are made by banks, credit unions, government agencies or schools.

While private student loans are generally not as good as federal student loans, there may be times when they are more beneficial.

What Kind of Student Loan Should You Get?

If you are applying for financial aid, your school will likely include student loans as part of your financial aid package. Importantly, colleges can be more adept than used car salespeople when it comes to quoting you the true price of an education.

The college’s “list price” may be $ 25,000 / year, but schools typically advertise that “75% of our students are eligible for financial aid.” This financial aid can be anything including Pell Grants, GI Bill, scholarships, or student loans. Buy wisely.

Federal student loans

There are three types of federal college loans:

  • Subsidized direct loans
  • Direct unsubsidized loans
  • Direct PLUS loans

Generally, federal loans offer more flexibility than private student loans:

  • You don’t need a credit check.
  • Some federal student loans offer income-based repayment plans, the repayment amount is based on the borrower’s salary after college.
  • Federal student loans generally allow you to change their repayment plan at any time.

For these reasons, most students apply for federal student loans first and then turn to private student loans to get the rest of the money they need for college. Federal loans can be limited by the parent’s income and other factors.

Private student loans

Private loans can help pay for your college education after exploring federal scholarships, grants, and student loans. The differences between federal and private student loans include:

  • Private student loans generally offer the choice of a fixed or variable interest rate. A variable interest rate may be lower than a fixed interest rate, which could reduce the total cost of the student loan.
  • Private student loans offer a variety of repayment plans, including options that allow you to make interest-only or fixed payments while you study. These school payments could lower the total cost of your student loan.
  • Private student loans may have higher limits.
  • Private student loans are not limited to those in financial need.
  • Private student loans offer flexibility as they can be taken out by a student, parent, parent, or spouse.

Pay off student loans

Whether you choose federal student loans or private student loans, you have to pay back the money you borrow, plus interest, whether or not you graduate. This is, of course, the hardest part of getting a loan. In 2014, the most recent year for which data is available, over 11.5% of people with federal student loans defaulted, only 2.4% of those with private student loans defaulted.

If you are having trouble with federal student loan debt, you should check out our page How to Choose the Best Federal Student Loan Repayment Plan.

Also check out this helpful page explaining your options for paying off private student loan debt.

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