What is the difference between federal vs private student loans?
Are you entering college and wondering what the differences are between federal vs private student loans?
This post is about federal vs private student loans.
Let’s dive into the top 7 federal vs private student loans:
1. Lender
While the recipient is the same, the lender is vastly different. Federal loans are issued by the U.S. Department of Education. Private loans are issued by banks, credit unions, or other (financial) institutions.
2. Interest Rates
Since Federal loans are issued by the government, interest rates are fixed and set by Congress. The rates are usually lower than private loans. On the other hand, private loans have variable or fixed interest rates that are set by the lender. The rate is usually based on the borrower’s credit worthiness. More on that next.
3. Credit Check
Federal loans don’t require a credit check, except for PLUS loans. That being said, a borrower’s credit score or worthiness doesn’t impact their eligibility or the interest rates. Meanwhile, private loans do require credit checks. As mentioned above, the rate is entirely based on the borrower’s credit worthiness. That being said, cosigners are usually required if the borrower doesn’t have very much or has bad credit history.
4. Loan Forgiveness
Federal loans have various opportunities for loan forgiveness. The most common is the one for people who work in public service jobs. However, private loans don’t usually have loan forgiveness programs.
5. Eligibility
For federal loans, eligibility is different for unsubsidized and subsidized loans. For unsubsidized loans, eligibility is not based on financial need. For subsidized loans, it’s based on need; however, students and parents need to complete their FAFSA application.
6. Grace Period/Subsidies
Federal loans have a 6-month grace period after leaving school (graduating); however, private loans do not generally have grace periods. Though that largely depends on the lender itself. As for subsidies, federal loans don’t accrue interest while students are in school (at a minimum of half-time). Private loans start accruing interest immediately after the loan is disbursed. Enrollment status does not matter in this case.
7. Repayment Flexibility
Federal loans provide different methods of repayments. For example, the options include income-driven repayment plans, deferment, and forbearance. Private loan repayment options depend on the lender, and are likely much more limited.
To reiterate, the top 7 federal vs private student loans are:
- Lender
- Interest Rates
- Credit Check
- Loan Forgiveness
- Eligibility
- Grace Period/Subsidies
- Repayment Flexibility
