If you’re looking at borrowing money to help cover college costs, you’ve likely heard a lot about federal student loans and private student loans. But what’s the difference between the two?
Federal vs. Private Student Loans
Federal student loans, as the name suggests, are federally-backed student loans that allow students (or parents) to take out a loan to help pay for college. The only way to be eligible for a federal student loan is to file the FAFSA (Free Application for Federal Student Aid) every year. It is a convenient way to fund your college years, but it is important to compare the different types of loans available, as terms will vary.
Private loans are not funded by the government, and are taken out through independent, private lenders. To apply for a private student loan, you’ll have to do research on your own to compare lenders and apply for a loan.
Some of the other key differences between federal and private student loans include:
- Interest rates
Interest rates on federal student loans are fixed, and can be lower than private student loan rates. On private student loans, interest rates typically vary for each borrower, and can be fixed or variable.
- Repayment plans
Federal student loans offer several repayment plans, whereas private student loan repayment plans vary by lender.
- When you have to start repayment
Most student loans give you a grace period of six months after graduating college before you have to start making payments on your loan. On federal loans, you aren’t required to begin repayment until after graduation or your enrollment status drops below half-time. However, each private student loan lender is different, and can require you to make payments as soon as you graduate, or even while you’re in school.
- Consolidation and refinancing options
Federal student loans can be consolidated into a Direct Consolidation Loan after graduation. Private student loans can not be consolidated, but can be refinanced into one loan. Check with your lender to see if they offer refinancing, or if you can refinance through another lender.
- Whether or not credit checks are required
Credit checks aren’t required for federal student loans, but are required for federal parent loans. Lenders for private student loans typically require a credit check to determine eligibility, and may require a cosigner with an established credit history.
All of these factors will vary between lenders and loans, so it’s important to do your research before you borrow.
Private Student Loan Lenders
There are many private lending companies, including banks and even credit card companies such as Discover and Wells Fargo that offer student loans for students attending school on either the undergraduate or graduate level.
Comparing private and student loan options is important if borrowers are going to get the best deal possible. Carefully consider interest types in both categories, as well as the reputation of the company if considering a private lender.
For the young person planning to attend college soon, it’s worth doing some homework and checking out some of the private lenders to see where someone can get the best deal on a private student loan.