When taking out a loan to fund college, there are two main options you can consider: a federal student loan or a private student loan.
This post explores the difference between each loan, so that you can choose the right one for your needs.
What’s the difference between a federal and private student loan?
Federal student loans are provided by the government to students and they are the most popular type of student loan. They have a standard term of 10 years and fixed interest rates. You must apply for these loans using a FAFSA form. No credit check or co-signing is required, however you must meet certain eligibility requirements (such as being a US citizen and demonstrating financial need). There is a strict cap as to how much you can borrow, but flexible payback options and the potential for loan forgiveness.
Private student loans are provided by various private lenders. Their term length can vary from 5 to 20 years. You typically need to pass a credit check, however cosigned student loans can also be an option. Your credit score can determine what interest rates you pay. Unlike federal student loans, you have the option to borrow a lot more. However, repayment options are generally not as flexible.
Why take out a federal student loan?
No credit check or cosigner needed
With the exception of PLUS loans, there is no credit check required when applying for a federal student loan. Neither do you need a cosigner. So, if you have a poor credit score and no-one is willing to cosign your loan, you can still apply and be granted a loan. Just be wary that you do still need to meet eligibility requirements.
Low fixed interest rates
Federal student loans generally have lower interest rates than private student loans. They also have a fixed rate, so you don’t have to worry about sudden rises in interest fees. This can make them cheaper in the long run.
Flexible payback options
Payback options can be a lot more flexible with a federal student loan. You often do not have to start paying anything back until 6 months after graduating from college (while some private student loan lenders may expect you to start paying the loan back during college). Monthly repayment amounts are adjusted based on your income and family size. This means that if you have a low income and large family, you may only be expected to pay back small amounts. After 10 years, if you’ve kept up with payments but still haven’t paid off the full amount, the loan is forgiven.
Why take out a private student loan?
Large borrowing limit
A big advantage of private student loans is that you typically borrow a lot more. Federal student loans only cover college tuition fees, while private student loans can be used to cover a variety of other qualified education costs – which includes additional courses, books and supplies such as laptops. Federal student loans are also capped based on income, meaning that you may not receive enough to cover tuition fees if your family earns over a certain threshold. Private student loans are not capped based on income, and are sometimes used by students to supplement federal student loans to cover any remaining tuition fees.
Better rates for excellent credit
In most cases, you get lower interest rates when using a federal student loan. However, if you have an excellent credit score, some private lenders may reward you with even lower interest rates than a federal student loan. It’s worth noting that applying with a low credit score may result in your application being rejected or higher interest rates.
Greater eligibility options
If you are not eligible for a federal student loan, you may still be able to find a private student loan that you are eligible for. For example, there are lenders out there willing to provide cosigned loans to international students. Meanwhile, some lenders do not take into account your family’s income, allowing even students with high-earning parents to apply.
Which is better suited for you?
A federal student loan could be better suited if you come from a medium to low income background or have a poor credit score. If you’re worried about interest fees or repayment options, a federal student loan may also be a good option. It is recommended that all US citizens that need a student loan try applying for federal student finance to see what they are eligible for.
Private student loans could be a better option if you have a good credit score or come from a relatively high income background. International students may also want to explore private student loan options. Private student loans can also be a good way to cover tuition fees that may not be covered by a federal student loan, while also covering other educational fees like books and equipment.