What Is The Difference Between Federal Student Loans And Private Loans?

Is it easier it get a private student loan? And should you?

Dear Kim,

I recently received my financial aid award package from the college I plan on attending. Unfortunately, I will need more money than what the Federal Stafford loan is providing. What is the difference between federal loans and the private loans? It seems to be easier to just get a private loan and not worry about federal loans.


Dear Alexis,

Congratulations on your acceptance to college. There are quite a few differences between federal and private student loans. The Consumer Finance Protection Bureau (CFPB) found that 54% of private student loan borrowers don’t exhaust their federal loans or don’t take them at all. This is an alarming statistic.

Federal loans do not require repayment until you graduate, leave school or go less than half time. Many of the private loans do require repayment while you are still in school. It is recommended that if possible, to make your interest payments on your federal loans while you are in school, but it is not a condition of the loan.

The interest rate on federal loans is fixed, which means it stays the same. Private loans typically have an adjustable rate, which means that the interest rate can go up. Private loans tend to start with a lower interest rate, known as a teaser rate to be more attractive to borrowers. Unfortunately, the interest rate does not stay that low. The undergraduate federal student loan may be subsidized, wherein the government pays the interest on the loans while you are in school at least half time. Private loans are not subsidized.

Private student loans often require a credit check. Many eighteen year old students have not established credit, which can result in either a higher interest rate or the necessity of a co-signer. Federal student loans do not require a credit check, with the exception of the Parent Loan for Undergraduate Students (PLUS).

Read more: Avoiding The Student Loan Trap

Lastly, there are multiple repayment options for federal loans. Some of these options tie your monthly payment amount directly to your income.  Private loans do not typically offer multiple repayment options. Federal loans offer deferment and forbearance under certain circumstances. There are also federal loan forgiveness programs available to those who qualify.

I recommend exhausting your federal loan options before taking private loans. If private loans are a necessity, please make sure that you read the fine print and understand what you are signing. Never borrow more than you absolutely need for your education. If you have any questions, please call one of our specialized student loan counselors at 1-800-992-4557.

Good Luck,

Kim Cole is the Education Outreach Coordinator for Navicore Solutions. Kim provides financial education workshops and seminars to communities. Readers can submit general questions relating to personal finance, credit scoring, debt management, student loans, home finance or bankruptcy which may be highlighted in the next month’s edition.

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