Help Center – Federal vs. Private Loans

Getting into college is the dream of every student but financing your education is another matter entirely. The first step in getting a college education is to decide if it’s going to require Federal or Private loans.

If you are in need of financial assistance, it is strongly encouraged to exhaust all federal aid first. Overall, there are a lot of factors that will influence your choice and a few of them will be discussed in this article.

FEDERAL STUDENT LOAN OPTIONS

Federal Loans are issued by the Federal government and are often cheaper to pay back. They are far easier to get and have far lower interest rates when compared to private Loans.

You can begin repayment 6 months after graduation and can even stretch out the payment plan or lower the monthly payments and the rates will not change throughout the life span of the loan.

Federal Loans are also capped based on the percentage of the borrowers income and can be subsidized, meaning that the government pays the interest, while you are still in school. Since federal loans are need based, credit does not need to be checked to qualify nor is a co-signer.

Federal Loans can be consolidated but this kind of Loan has a limit of $27,000 over 4 years for students that are considered as dependents and $45,000 for students that are independents.

There are 3 types of Federal Loans.

Stafford Loans, Perkins Loans and Direct PLUS Loans aka Parent Loans for Undergraduate students. PLUS Loans are primarily the responsibility of parents to pay back and repayment begins 60 days after the Loan has been granted or 6 months after the student takes a course less than 6 credits.

Federal Perkins Loans (Need Based)

Federal Perkins Loan is a need based Loan. This simply means that the college or      university has to determine which student needs the most help and grant loans according to need.

Federal Perkins Loans have a low fixed rate of 5%. Undergraduates can borrow up to $4000 and Graduates can borrow up to $6,000.

Over 4000 colleges and Universities participate in the Federal Perkins Loan Program and unlike other FederalLoans;the funds are dispersed by the College or University.

Federal Perkins Loan can be sent directly to the student in need or directly applied to the students tuition account.

To be eligible for a Federal Perkins Loan, you must meet the following criteria.

  1. You must be a US citizen, permanent resident or be eligible for non-citizen status.
  2. You must be enrolled at least half-time in a degree program.
  3. You must have average performance in your grades.
  4. You must be able to prove low income and that you need the Loan.

Federal Stafford Loan (Need based)

The most common Federal Loan for students is the Stafford Loan. To apply for this loan you do not need to demonstrate financial need though any student can apply for it but you must at least be enrolled at least half time.

Students who apply for a Federal Stafford Loan instead of their parents have a higher annual loan limit and might get higher amounts of unsubsidized funds.

Federal Stafford Loans have fixed interest rates and are of 4 types.

  • Stafford Subsidized Federal Student Direct Loan
  • Stafford Unsubsidized Federal Student Direct Loan
  • Stafford Subsidized Federal Family Education Loan and
  • Stafford Unsubsidized Federal Family Education Loan

Subsidized Federal Stafford Loan

When your loan is subsidized, you do not need any interest while you are still in school. The government takes care of that for you until 6 months after you graduate.

To get a subsidized loan, you must be able to prove that you need the loan or are in financial need, since it is a need based Loan.

Your financial status is determined when your EFC and other loan sources are deducted from your college cost or tuition.

With subsidized loans, you don’t need to pay interest rates on the loan while you are still in school at least half time and you are given a 6 month grace period after graduation to begin servicing the loan.

Unsubsidized Federal Stafford Loan

You have to pay all interest rates for your loan even while you are in school but you can also apply to defer payments until after graduation.

With Federal Student Loans, the amount that can be borrowed depends on the time of the year. Freshmen can borrow up to $2,652 and seniors can borrow up to $5,500 a year.

This kind of Loan is not given based on need or on your financial condition. Once you get an unsubsidized Loan, the Loan interest begins to build up until you have repaid the loan in full. 

Differences between Stafford Direct and Stafford Federal Family Education Loan

With FFEL, you receive the funds from a private lender and remit your loan payments to the lender but with direct loans you get Loans directly from the Federal government and remit your loans payments to the Department of Education (DoED).

Federal Direct Plus Loans (Credit based)

Federal PLUS loans are loans that graduate or professional degree students and parents of dependent undergraduate students can use to help pay education expenses. The U.S. Department of Education makes Direct PLUS Loans to eligible borrowers through schools participating in the Direct Loan Program.

Unlike other Federal loans, the borrower must not have an adverse credit history to be eligible to apply otherwise the borrower will need a co-signer or endorser.

Parents can borrow the full amount of the student’s tuition minus the value of any other grants, Financial Aid or loans received.

Federal Plus Loans have a low fixed interest rate (6.41%) that is higher than Stafford Loans (3.86%-5.41%) and repayment will begin once the loan has been dispersed (paid out). In some cases parents can defer payments till after graduation or if their child drops below part-time requirements.

To get a Federal Plus Loan, parents need to fill a FAFSA form, pass a credit check and apply for funds each academic year.  As stated above, in place of a credit check parents can get a co-signer or endorser. The federal government doesn’t check incomes or employment status before approving these loans.  Also, keep in mind that there maybe an 4% origination fee.

  • IMPORTANT NOTE: The parents are fully responsible to repay the outstanding debt. This is something to consider when planning retirement. If you are concerned about this, consider applying for a private loan with a good co-signer release program. Learn more.

PRIVATE STUDENT LOAN OPTIONS 

Private Loans have variable rates and the interest rates are reset every quarter though loan lenders are free to charge whatever rates they see fit.

The average interest rate on private Loans is 12%. This is double of Federal Loan rates.

You have to begin paying interest 6 months after funds have been disbursed and have a limited repayment period of 20 years.

Private loans are never subsidized because you must pay all interest yourself. To get a private loan you must have a good credit score or have a credible co-signer.

There are 2 basic types of private loans.

  1. School Channel Loans and
  2. Direct to consumer Loans

School Channel Loans are dispersed via the specific institution. The college or university gets the funding and applies it directly to the students account.

Your college’s financial aid department will typically handle the disbursement of this kind of loan.

Direct to Consumer Loans are given directly to the student and the student decides how to apply the loan to his/her educational needs. It must be noted, however, that this kind of loan has higher interest rates.

Private could mean more

Private loans are a totally different beast than federal loans. They typically have higher interest rates, there are limited forbearance or extension policies and there are no laws that regulate the interest rates or how the loan should be paid back. However, there can be a big difference between for-profit lenders (i.e. Sallie Mae) verses non-profits private lenders such as credit unions

It is left totally to the discretion of the lender to determine the rules. It is advisable that you do proper research before taking on any kind of student loan, especially private student loans.

Co-Signers for Private Loans

Unlike some federal loans, getting a co-signer is crucial with private loans. The only exception where a co-signer or co-borrower is not mandatory for student loans is in the case where the borrower has excellent credit rating or history. In such a case, the lending institution might decide that the borrower might not need a co-signer.

This is the singular reason that most international students prefer private loans.  Naturally speaking, students will want to use their parents as co-signers. Now imagine a family with 2-3 kids that want/need a private a loan. It might become difficult for the parent to decide which child to sign for.

Co-Signer Release

Co-Signer releasemeans that the co-signer can be released from the loan agreement in the future. The reason why a co-signer is needed in the first place is because the typical student might not have extensive credit history.

However, it is a different issue when the student graduates. He or she is expected to make enough money to begin to make loan payments.

Different lenders have varying co-signer release agreements but there are three main requirements to release a co-signer.

1. You must have fulfilled all prior monthly payments as set by the loan company.

2. The borrower must meet a minimum income requirement and must have good credit standing in order to qualify take over the loan.

3. The borrower must send in a request to the lender in writing to remove the co-signer from the contract. The lender will review if the above criteria have been met and approve or reject the request. 

What To Do Before Committing A Co-Signer.

There are certain things you should be aware of before asking anyone to be a co-signer for your student loan.

  • You need to be aware of all the criteria that are necessary for co-signer release (minimum number of payments, income requirements etc).
  • Does your co-signer have other financial commitments?
  • Is he or she already a co-signer for another student?
  • Study the loan policy. Can it be consolidated upon graduation? This would mean that the co-signer can be removed from the loan since the consolidated balance would apply solely to the borrower.

Making the choice to become a co-signer should not be taken lightly as the release clause might be tricky. There have been situations where the co-signer of a student loan ends up regretting the decision after it is made.

Co-signing can restrict the co-signer from making important financial commitments such as buying a house or a car or even co-signing for another sibling or child. Do proper research and understand the terms of the lender before committing to anything.

Private Loans: The Pros

  1. Most private loans have simple application processes. It can be done online or via telephone unlike federal loans where you have to have physical appointments.
  2. Funds are made available immediately after they have been approved.
  3. Most private loans do not require that you fill a FAFSA form.
  4. Sometimes the interest on private loans are tax deductible.
  5. Co-signer options are generally available.

Private Loans: The Cons

  • Private loan lenders always insist on a proper and full credit check.
  • Private loan lenders mostly have higher interest rates than Federal Loans
  • Unlike federal loans, you have to apply for loans every year. For the fact you were approved this year does not mean you will be granted one next year.

So which should you choose, Private Loans or Federal Loans?

Federal Loans might seem like the ideal kind of loan for any student but as the cost of education soars, federal loans can no longer cover the tuition fee for average college and university courses.

In the end only you can decide the type of loan you should get. Take your time, do the research and make the right choice.


Federal vs. Private Loans
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