Federal vs. Private Student Loans

At last, the college admissions process is over. You’ve filled out your FAFSA, chosen your school, and gathered your scholarships. If you’re like most students, scholarships, savings and financial aid probably don’t cover the entire cost of your education. Aside from tuition, there’s room and board, living expenses, textbooks – the list goes on. One option is to supplement your funds with student loans.

The two major categories of student loans are private student loans and federal student loans. While each has its advantages and disadvantages, it’s important to carefully consider which one is best for you.

Here’s some information to consider:

Federal Student Loans

Federal student loans are available to students enrolled at least half-time in a certificate or degree program at a participating higher education institution. These loans are funded by the United States government and awarded to eligible students as part of a college’s financial aid package. There are three types of federal Direct Loans available through the U.S. Department of Education (excluding direct consolidation):

• First, Direct Subsidized Loans are offered to students who show financial need, these loans do not charge you interest while you are in school at least half-time.
• Second, Direct Unsubsidized Loans do not have a requirement to show financial need and also come in larger amounts than subsidized loans.
• Third, Direct PLUS Loans are federal loans offered to parents of the dependent undergraduate student so that they can help you pay for school. There is no financial need requirement, but the borrower has to have a good credit history. It is also available for graduate or professional students.

Pros of Federal Student Loans:

• No credit history necessary. Many college students opt for federal loans because they generally do not require credit history. This means that a cosigner is not necessary when applying for a federal loan.
• Low interest rates. Federal student loans have the appeal of low, fixed interest rates for undergraduate students. This means that throughout the life of the loan, the interest rate stays the same. Also, if the loan is subsidized, you won’t need to pay interest until after you’ve finished your undergraduate studies.
• Federal benefits. You can get access to income-based repayment plans. Some borrowers may even qualify for student loan forgiveness. Federal loans are also flexible, allowing you to defer payments if you’re having trouble paying on time.

Cons of Federal Student Loans:

• Borrowing limit. The most significant limitation is the cap on the amount of money that you can borrow. If you are an undergraduate student, the most you can borrow each year ranges between $5,500 and $12,500. The amount varies based on your dependency status and your school year.
• Rates for graduate students. Graduate students are charged higher interest rates than undergraduate students when it comes to federal loans. Graduate students also don’t have the option to take out subsidized loans, which means that the government won’t pay your interest while you’re in school.

How to Apply

Students and parents must complete a Free Application for Federal Student Aid (FAFSA) by the college’s annual deadline. Financial and household data submitted in the application are used to calculate an Expected Family Contribution (EFC). This figure is subtracted from the college’s Cost of Attendance (COA) to determine financial need. The same student may be eligible for both Direct Subsidized and Unsubsidized Loans. Students are solely responsible for the repayment of either type of loan.

Private Student Loans

Many students find that federal loans don’t cover the full cost of attending. To fill that gap, they will take out private student loans in addition to federal student loans.

Private student loans are available to creditworthy students enrolled in a degree program at an eligible college or university. Some lenders may have minimum enrollment requirements to qualify. Students can receive loan funds from financial institutions, such as banks, credit unions, or other financial entities. Private student loans may have fixed or variable interest rates and a variety of repayment terms, so it’s a good idea to shop around. Getting the best rates is dependent on factors such as credit history or whether there will be a cosigner.

Pros of Private Student Loans:

• Borrow up to the full cost of education. You may be able to borrow enough money to cover the entire cost of your education.
• Borrowing choice. You can obtain a private loan from a variety of lenders – this most likely includes your current bank or credit union. Some even offer interest rate reductions to borrowers with existing relationships.
• Varying interest rate options. Unlike a federal student loan, a private student loan gives you the option to choose either a fixed or variable interest rate. If you don’t want to be locked into a constant interest rate through changing market conditions, you could opt for a variable one. Having a cosigner with good credit may help you get an even lower interest rate than federal student loans offer.

Cons of Private Student Loans

• Need for a cosigner. If you’re a recent high school grad with little to no credit history, you will typically need a cosigner. Assure lenders that the loan will be repaid by having a cosigner with a positive credit history.
• Higher interest rates. Although you can choose between a fixed and variable rate, private loan interest rates are generally higher than federal ones. If you or your cosigner has excellent credit, there may not be much of a difference.
• No federal benefits. If you take out loans through a private lender, you may not have access to the same benefits offered by the federal government. These can include income-based repayment plans, deferment options, and student loan forgiveness eligibility.

How to Apply

Start with a trustworthy lender. LendKey offers private student loans through a network of banks and credit unions. Students must generally meet age, credit, and citizenship requirements before loan approval. Student applicants who do not have a credit history or a steady source of income will oftentimes need to apply with a qualified cosigner.

Borrowing limits are generally based on the school’s COA. Students and cosigners, as applicable, are responsible for repayment.

Check out our private student loans page to learn more about your options.

It’s Your Choice

As you weigh your funding options, remember that student loans aren’t an either-or proposition. It’s possible to use both federal and private student loans to pay for your student’s college education. Whether you choose to borrow the entire cost from a private lender or mix private student loans with federal student loans, make sure you do your research.

Apply now or learn more when you visit LendKey’s Private Student Loan FAQ page or visit our blog.