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Federal student loans vs. private student loans

Bankrate December 4, 2019

The first detail to understand about student loans is that there are two main kinds — federal student loans and private student loans. Federal student loans are overseen and guaranteed by the federal government whereas private student loans are offered on the open market by a wide range of student lenders and banks.

Types of federal student loans

When it comes to federal student loans, there are different options available with varying terms and requirements. The main types of federal student loans include:

  • Direct Subsidized Loans: These loans are intended for undergraduate borrowers who exhibit “financial need.” The federal government pays interest on Direct Subsidized Loans while the student is in school at least half-time, for the first six months after you leave school (the so-called “grace period’), or during a period of deferment (or postponement of loan payments).
  • Direct Unsubsidized Loans: These loans are made to undergraduate, graduate and professional students regardless of need. Because they’re unsubsidized, they begin accruing interest right away.
  • Direct PLUS Loans: These loans are made to graduate students, professional students and parents of undergraduate students to cover higher education expenses when other loans have been exhausted. Eligibility is not based on financial need, but to qualify you will need to have good credit or a cosigner.
  • Direct Consolidation Loans: This federal loan allows you to consolidate all your federal student loans into one new loan with a new interest rate based on the weighted average of your existing rates. These loans won’t save you money as a result; instead, they aim to help you simplify repayment by merging several loans into one.

Benefits of federal student loans

Most experts suggest taking advantage of as much federal student aid, including federal loans, as you can before you consider private student loans. This is because federal student loans tend to come with lower interest rates and some consumer protections private student loans don’t offer.

The main benefits of federal student loans include:

  • No credit check or cosigner is required for most federal student loans
  • No required repayment until you leave school or drop below half-time
  • May be able to qualify to have your interest subsidized when you’re in school
  • Flexible repayment plans including income-driven repayment plans
  • Access to student loan forgiveness programs
  • Access to deferment and forbearance

Benefits of private student loans

As we mentioned already, private student loans are offered by private lenders who have their own qualification guidelines. This means you can only apply for private student loans if you can pass a credit check with “good” credit, which is typically considered any FICO score of 670 or higher. Some private student lenders also require credit scores that are much higher, and many include minimum income requirements in their general standards for eligibility.

While federal student loans are typically the best option, there are some perks that come with private student loans:

  • Interest rates can be lower than federal student loans for consumers with excellent credit
  • You can alter your monthly payment and repayment timeline to suit your monthly budget and goals
  • You can shop around and compare rates among multiple lenders, whereas federal loans come with predetermined fixed rates that don’t change

How to get a student loan

If you need to pay for college and know taking out loans is required, you’ll start the process by filling out the Free Application for Federal Student Aid, or FAFSA form. This form gathers all your relevant personal and family financial details in one place in order to gauge your ability to qualify for federal student aid, including loans and grants.

After you fill out the FAFSA form, you’ll receive a Student Aid Report (SAR) from the federal government, which is a summary of the information you’ve submitted. This form won’t tell you how much aid you qualify for, however. You’ll receive that information from the college or career school you applied for once you’ve been accepted via a paper aid offer or award letter. This letter informs you of how much aid you’re eligible for as well as what kind.

When it comes to applying for private student loans, the process is even simpler. You can apply for private student loans online. Some online student loan comparison tools enable you to shop around and compare multiple student loan offers in one place.

You can even get prequalified with multiple lenders within a few minutes with some private student loan companies. Private student loans may be more difficult to qualify for, however, since you’ll need good credit or a cosigner.

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