Federal Student Loans vs. Private Student Loans
Are you beginning the process of figuring out how you're going to pay for college? Financial aid is great – it'll help you achieve your education dreams, but it's a complex process with a growing variety of student loan options from which to choose. Assuming you've explored all opportunities for scholarships and grants, your next option is to research student loans. These come in two general categories: federal student loans and private student loans.
The first place any prospective student should start is with federal student loans. Federal student loans are backed by the U.S. government and are available directly through your school or through banks and student loan lenders via the Federal Family Education Loan Program (FFELP). These loans typically have lower interest rates, multiple repayment options, longer repayment periods, and much easier credit requirements than private loans. In order to receive a federal student loan, you must complete and submit the FAFSA, the Free Application for Federal Student Aid. For assistance with this form, visit FAFSAonline.com.
Federal student loans come in a variety of forms, from need-based aid to loans targeted to parents:
The Perkins Loan offers a very low fixed rate of 5% to undergraduate and graduate students who demonstrate financial need. Depending on your level of need, undergraduates can borrow up to $4,000 and graduate students up to $6,000. Unlike other federal loans, the funds are dispersed from the school and the student does not have to be enrolled at least half-time to be eligible.
The Stafford Loan is the most common federal student loan as it is not necessary to demonstrate financial need – anyone can apply. These loans carry a fixed interest rate and come in two forms: subsidized and unsubsidized. The interest on subsidized Stafford Loans is paid by the government while the student is in school; the student pays the interest on unsubsidized Stafford Loans but they can defer making any payments until graduation. All Stafford Loans require the student to be enrolled at least half-time. Depending on year, students can borrow between $2,625 (freshmen) and $5,500 (senior) a year.
The Parent Loan for Undergraduate Students (PLUS) is targeted to parents of dependent undergraduate students who are enrolled at least half-time. Although there is not a full-scale credit check for these loans, the applicant must not have any adverse credit experiences on their record (e.g., bankruptcy, default). Parents can borrow up to the student's cost of attendance less any other aid the student has received. These loans carry a fixed interest rate that is higher than the rate for Stafford Loans, and repayment starts while the student is in school.
Private (or Alternative) Loans
As mentioned above, you should exhaust your options for federal loans before turning to private student loans. But federal loans often do not fully cover the cost of tuition. The market for private loans has been growing dramatically in recent years to help fill the gap between rapidly rising tuition costs and funding from federal Stafford loans. There are a few pros and cons to consider when looking for private loans.
- Students can borrow up to 100% of the cost of education
- Many offer borrower benefits that can reduce the interest rate
- Lower rates may be available if your school certifies enrollment and the check is sent directly to the school
- Funds may be used for tuition, room and board, books, or a computer
- You are not required to complete the FAFSA
- These loans are subject to a credit check, which will determine approval as well as your interest rate (using a Cosigner significantly increases your chances of approval)
- The interest rate is variable and may increase over the life of the loan
- Private student loans may not include a deferment option