Federal vs. Private Student Loans
The federal government administers the federal student loan system through the Department of Education. Generally speaking, the federal student loan is a more advantageous loan for borrowers. In order to receive federal student loans, you will have to complete and submit a Free Application for Federal Student Aid (FAFSA)Links to an external site. each academic year that you will be attending school. Filling out this application will determine your eligibility for most federal, state, and institutional financial aid including loans, grants, and scholarships. This is your financial aid package. Depending on what your package consists of, you may be able to borrow less in loan dollars.
If you are going to use federal loans, you will need to understand the terms and conditions that these loans carry fully. You will be required to take Loan Entrance Counseling before you can receive these loan funds. It is important for you to carefully review the information in this counseling so that you understand what you are borrowing. For example, federal loans come in two different forms, SUBSIDIZED and UNSUBSIDIZED. The subsidized loans are more beneficial for you because the government will pay the interest on these loans for you while you are in school. In contrast, the unsubsidized loans will be accruing interest from the moment they are disbursed to your account.
Private student loans are not issued by the government and are created by private financial institutions. These loans are not necessarily bad and can be utilized if needed, but the borrower should be aware of some key differences between these private loans and the federal loan system. Just as you need to read the federal loan documents carefully, you will need to read and understand the terms and conditions of your private loans as well. Some differences between the two types of loans may include:
- Private loans will require a credit check, and federal loans do not (parent plus loan does)
- Private loans may need to be paid back immediately; federal loans will go into repayment after graduation
- Federal loans offer multiple repayment plans; private loans may not offer multiple repayment options
- Federal loans offer forbearance and deferment; private loans may not
- Federal loans have a fixed interest rate; private loans may carry a variable rate
Your pursuit of higher education is a journey that will hopefully result in you living the life that you have always envisioned for yourself. This vision of your future most likely has you living with financial security and a high degree of financial well-being. Being able to utilize educational funding options in the most appropriate manner is one way to help ensure that your vision of the future turns into reality. Being able to borrow only what you need to borrow and making the best choice of available loan resources will pay off today and for years after you have finished your education.