Home Financial Aid Tips Federal vs. Private Loans: What is the Best Loan Type for You?
Federal vs. Private Loans: What is the Best Loan Type for You?

Federal vs. Private Loans: What is the Best Loan Type for You?

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federal-private-loansWhen borrowing student loans, it is important to weigh all of your options and choose which loan best fits your needs. Federal student loans are funded by the government. Private student loans are non-federal loans, made by a lender such as a bank, credit union, state agency, or school.

There are pros and cons of borrowing federal loans and borrowing private loans. Since federally-guaranteed loans are offered by private lenders who also offer private student loans, some borrowers may be confused concerning the difference between the loan programs.

Here are a few of differences between Federal and Private Loans:

  • Applying for a private student loan is much simpler than applying for federal education loans.
  • Private loans can be applied for through banks and Federal student loans are applied to through the Department of Education Free Application for Federal Student Aid (FAFSA) at www.fafsa.ed.gov.
  • There are eligibility requirements for Federal loans that do not affect Private loans.
    • For example, Students who are not making Satisfactory Academic Progress (SAP) by maintaining a minimum 2.0 GPA are ineligible for federal student loans.
  • Private loans are offered by private lenders and there are no federal forms to complete like the FAFSA. Eligibility for private student loans often depends on your credit score
  • The interest rates on federal education loans are fixed, while the interest rates on private student loans are variable and may increase over the life of the loan.
    • The interest rates and fees you pay on a private student loan are based on your credit score and the credit score of your cosigner, if any.
  • Most private student loans have a 20 year loan term with an option to extend them by 5 years.
    • Extending them by five years does not do much to cut down the monthly payments or make them more affordable. However, it results in a lower monthly payment compared to the standard 10 year term of a federal education loan despite the higher interest rate.
  • Federal loans come with a standard 10 year term. There are options to stretch out repayment plans and lower monthly payments.

If you have any questions or are confused on which loan you would like to borrow, your schools financial aid office should be able to provide you with information. This will provide you more insight before you jump into borrowing student loans. Taking initiative and educating yourself on student loans is the first step of becoming a responsible borrower.

More information on Federal vs. Private Loans can be found at Federal Versus Private Loans | Federal Student Aid

More information on Public vs. Private student loans can be found at FinAid | Loans | Loan Tradeoffs – Public vs. Private

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