An integral aspect of contemporary financial aid packages, student loans can bridge the gap between scholarships and grants and educational-related expenses. Student loans generally fall into one of two categories: federal and private. This, of course, raises the question — what are the basic differences when it comes to private vs government-backed student loans?
Federal Student Loans
Recommended by experts as the first choice of funding when it comes to academic borrowing, federal student loans offer several advantages. Among them are fixed interest rates, income-driven repayment plans, and forgiveness programs. Additionally, many federal student loans are subsidized, in that the government makes interest payments as long students are enrolled in classes on at least a half-time basis.
Within the category of federal loans are four basic varieties. These are Direct Subsidized, Direct Unsubsidized, and Direct Plus; the latter of which are either Grad PLUS or Parent PLUS. Parent PLUS loans are issued to students’ parents while Grad PLUS loans go to students pursuing post-secondary studies. By and large, federal loans (other than those of the PLUS variety) are granted without credit checks.
Flexible repayment is another benefit, in that monthly payment amounts can be income-based. Moreover, repayment schemes can be altered after loans are granted. Government-backed student loan repayment is typically deferred until after graduation but kicks in if the student leaves school or their enrollment status falls to less than half-time.
Interest rates are usually (though not always) lower than those of most private student loans as well. Another key benefit of government-backed loans is the availability of loan forgiveness programs for graduates who enter fields of employment considered to be of service to the public good.
Private Student Loans
Offered by banks, credit unions, and other types of financial organizations, private student loans are recommended when U.S. Department of Education financial aid packages fall short of what you’ll need to cover your academic-related costs.
Interest rates on private student loans can be either fixed or variable and can be lower than those charged on federal loans under certain circumstances. Organizations like Juno organize private borrowing into collectives of students to help bring the associated costs down as much as possible.
Applying for a private student loan is much like applying for any other type of financing. Your credit history and income level will be considered before an offer is made. On the other hand, unlike federal loans, private loan amounts are limited only by your perceived ability to repay.
Moreover, with a strong credit score, you might find yourself with a lower interest rate than you could get from a federal loan. On the other hand, many private loans require payments while students are still in school, though others will permit deferment if enrollment requirements are met.
Is One Better Than the Other?
Those in the know tend to agree that you should go for subsidized federal loans first. Your second choice should be unsubsidized federal loans and you should go for private loans if you need even more money.
Among the factors, you should consider when determining which private loan to take is whether the interest rates are fixed or variable. You’ll also want to know whether payments can be deferred until you’re no longer in school at least half-time.
And ideally, the loan will be granted with no pre-payment penalty if you find yourself positioned to pay it off before it runs full term. This can save you quite a bit of money on interest payments.
Ultimately though, choosing between private vs government-backed student loans comes down to whether you can cover all your costs with federal money. In many cases, private student loans can be the difference between earning your degree and being unable to cover the costs of doing so.