When it comes to repaying your student loans, you have two options: a federal loan or a private loan. The differences between them are significant and must be taken into account when deciding how to repay your student debt. Here’s a quick overview of the main differences for you to consider. In this article we will discuss student loans vs private loans, private student loans vs personal loans, federal student loans vs private loans, which is the more economical student loan to take out a federal loan or a private loan and three key differences between federal and private student loans.
Student loans are a great way to help you pay for college, but it can be hard to figure out which type of student loan is best for your situation. There are several types of student loans, including federal and private loans. Read on to know more on student loans vs private loans, private student loans vs personal loans, federal student loans vs private loans, which is the more economical student loan to take out a federal loan or a private loan and three key differences between federal and private student loans.
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student loans vs private loans
We begin with, student loans vs private loans, then, private student loans vs personal loans, federal student loans vs private loans, which is the more economical student loan to take out a federal loan or a private loan, and three key differences between federal and private student loans.
Whether you choose federal student loans or private student loans, you have to pay back the money you borrow, plus interest—whether you graduate or not. Student loans are legal agreements, so be sure you understand what you’re signing. If something isn’t clear, ask your school counselor or lender for help. There are three types of federal loans for college:
Direct Subsidized Loans
Direct Unsubsidized Loans
Direct PLUS Loans, of which there are two types: Grad PLUS Loans for graduate and professional students, as well as loans that can be issued to a student’s parents, also known as Parent PLUS Loans.
In general, federal student loans provide additional flexibility in several areas than private student loans:
Borrowers don’t need a credit check to be considered (except for the Federal PLUS Loans for parents and graduate students).
Some federal student loans offer income-driven repayment plans, where the rate of repayment is based on the borrower’s salary after college.
Federal student loans allow the borrower to change their repayment plan even after they’ve taken out the loan.
It’s important to consider federal student loans before you take out a private student loan because there are differences in interest rates, repayment options, and other features.
Private student loans can help you pay for college after you’ve explored scholarships, grants, and federal student loans.
Private student loans usually offer the choice of a fixed or variable interest rate. Fixed rates stay the same, giving you predictable monthly payments. Variable rates may go up or down due to an increase or decrease to the loan’s index.
Private student loans offer different repayment plans—including options that allow you to make interest-only or fixed payments while you’re in school. These in-school payments could lower your total student loan cost.
Some private student loans allow you to track your credit health for free with quarterly FICO Credit Scores.
Private student loans offer flexibility, since they can be taken out by a student (often with a cosigner), parent, or creditworthy individual (e.g. guardian or other relative).
private student loans vs personal loans
Next we review, private student loans vs personal loans, then, federal student loans vs private loans, which is the more economical student loan to take out a federal loan or a private loan, and three key differences between federal and private student loans.
The average cost, including tuition and fees, of attending a public 4-year university was $8,800 in the 2016-2017 school year, according to the National Center for Education Statistics. Students at private nonprofit 4-year universities had it even worse, shelling out $33,500 on average.
With a price tag like that, you might wonder how you’ll ever be able to pay for an undergraduate degree. Personal savings, scholarships and federal loans might go a long way toward footing the bill and indeed, it’s always best to use up these sources first.
But if those options don’t cover all your college-related expenses, you might decide to take out a loan to cover the rest. Private student loans and personal loans for college are two possibilities to help you bridge that last gap, but which one is better?
Let’s look at how each works.
Do private loans or personal loans for college have better interest rates?
In general, interest rates for private student loans are better than interest rates for personal loans, although your credit can strongly affect the interest rate you’re offered for a loan.
The best interest rates on private student loans are typically tied to the Libor (around 2.1% as of July 2018) plus 1.8%, meaning that the best rates could be as low as 3.9% — not bad at all. But they can also reach higher than 18%. On the other hand, the average personal loan interest rate for a 24-month loan from a commercial bank was 10.31% APR, according to a May 2018 analysis by the Federal Reserve.
How are private student loans and personal loans for college paid out?
Certified private student loans are typically paid out directly to your school, with anything left over being sent back to you from your school. Noncertified private student loans and personal loans, on the other hand, are typically paid out directly to you. This can be both good and bad. On one hand, it’s easier to get the money quickly, but on the other, you might be tempted to use it for other things or take out more than you need.
What are the repayment terms for private student loans and personal loans?
Both private student loans and personal loans offer a wide variety of repayment terms, depending on the lender.
One difference is that many private student loan lenders offer repayment features that are more beneficial for students than personal loans. For example, if you qualify, some student loan lenders allow you to choose between paying while you’re in school or deferring payments until you’re done with school. But with a personal loan, you’re expected to start repaying the loan immediately.
Some private student loan lenders even allow you to start making interest-only payments while you’re still in school to ease the burden a bit after you graduate. And while every lender might not provide forbearance requests like with federal loans, some will still do so.
Finally, it’s common for private student loan lenders to offer a small discount if you sign up for autopay.
Co-signers and credit requirements
Both private student loans and personal loans will likely require a credit check, unlike most federal student loans. And since it’s common for students to have little, no or even poor credit history, you may need a co-signer to help you get approved for a private student loan or a personal loan. If your co-signer has good credit, you might even be eligible for better interest rates on your loan.
In fact, according to the CFPB, in 2011 over 90% of private student loans were taken out with the help of a co-signer. Of course, your co-signer would be as much on the hook for repaying the loan as you. So if you default (or fail to meet the loan terms), the lender will expect your co-signer to repay the loan. And if you make late payments, it could harm your co-signer’s credit as well as yours.
Your co-signer may eventually be able to have their name taken off your student loan. The lender most likely won’t do it for you automatically — or even notify you when you’re eligible to have your co-signer released. It’ll be on you to check whether the lender offers co-signer release and apply for the release.
Tax deductibility and student loans
Though you can’t deduct the interest paid on personal loans on your taxes, you may be able to write off the interest paid on your private student loans. This tool from the IRS can help you determine if your loan is eligible.
And one of the benefits of the student loan interest deduction is that you may be able to take advantage of it even if you claim the standard deduction rather than itemizing deductions.
But not all good things last forever: If you become a high-earner, this deduction gradually phases out after your income reaches $65,000 (or $135,000 if you file jointly with your spouse).
federal student loans vs private loans
Now we find out, federal student loans vs private loans, then, which is the more economical student loan to take out a federal loan or a private loan, and three key differences between federal and private student loans
There are two main categories of student loans to choose from: federal loans, which are offered by the federal government, and private loans, which are originated by banks, credit unions and online lenders.
Federal student loans come with far more benefits than private loans do, making them the best choice for most people. But federal student loans also come with annual limits, which means some borrowers may pursue private student loans to make up for a gap in college funding.
Here’s what you should know about federal vs. private student loans, and how to decide which option is best for you.
1. You Must Submit the FAFSA to Get Federal Loans
The golden rule of financial aid is that you must fill out the Free Application for Federal Student Aid (FAFSA) to access federal student loans, grants, work-study and other forms of support. The FAFSA is available each Oct. 1 for the following school year, and it collects financial and family information so that the government can determine how much federal student aid you’re eligible for.
Fill out the FAFSA as early as possible, since some types of federal, state and school grant funding are first-come, first served. You don’t need to submit the FAFSA to receive a private student loan, though you’ll have to fill out an application that includes credit, income and other financial and personal information for you and your co-signer, if you need one.
2. Federal Student Loans Generally Have Lower Interest Rates
Interest adds to the overall cost of your loan, and for many borrowers, the interest rate is the deciding factor in which loan to choose. Here, almost every time, federal student loans win out over private loans. That’s because anyone who takes out a federal student loan gets the same low, fixed rate—meaning it doesn’t change over time—regardless of credit score or income.
For the 2020-21 school year, rates on federal subsidized and unsubsidized student loans for undergraduates is 2.75%. By contrast, fixed rates on private loans for undergraduates start at 3.49% on Forbes Advisor’s list of the best private student loans—and the highest possible rate is 14.5%.
Students with little or no credit history and borrowers with less-than-excellent credit particularly stand to benefit from low federal loan rates. That’s because private loans always require a credit check, and a co-signer is often needed to qualify or get lower rates in these circumstances.
One thing federal loans have that many private loans don’t? An origination fee. Federal subsidized and unsubsidized loans come with an origination fee of 1.057% of the loan amount, deducted from the loan proceeds when they reach your bank account. The best private loans don’t charge origination fees—but their higher rates often counteract the fee savings.
3. Federal Student Loans Have More Borrower Benefits
The consumer protections you’ll enjoy as a federal student loan borrower are just as important as the amount you’ll save on interest. These include:
Up to three years in deferment and forbearance if you experience an economic hardship
No interest accrual while in school, during your grace period and while your loans are in deferment if you have federal subsidized loans
Guaranteed six-month grace period after you graduate or leave school before monthly payments begin
A wide range of repayment plans to choose from, including graduated and extended repayment
Income-driven repayment (IDR) options if your loan balance is high relative to your income
Student loan forgiveness if you choose an IDR plan or you qualify for career-based loan cancellation programs such as Public Service Loan Forgiveness (PSLF) or Teacher Loan Forgiveness
270 days before loans go into default due to nonpayment; private loans can go into default much sooner
Particularly if you’re considering a career that leads to low or irregular income, federal loans provide multiple opportunities for limiting or pausing payments. Private student loans, on the other hand, may offer only 12 months of forbearance instead of three years, or few chances to lower monthly payments over the long term. In nearly all cases, private lenders also do not provide forgiveness to borrowers in certain careers or who choose certain repayment plans.
4. Federal Student Loans Come With Greater Disaster Relief
During the Covid-19 pandemic, federal loan borrowers are receiving unprecedented repayment relief through automatic forbearance and an interest rate cut. Between March 2020 and September 2021, the federal government is requiring no monthly payments and has slashed interest rates to 0% for borrowers in repayment. That means that during the forbearance period, borrowers’ loan balances will not grow.
Many private lenders have offered relief in the form of a special Covid-19 forbearance, but it’s typically available in three-month increments only. Interest on private loans continues to accrue.
5. Most Federal Student Loans Aren’t Credit-based
Subsidized and unsubsidized federal loans require no credit check meaning any college student can qualify.
However, PLUS loans for graduate students and parents do come with credit requirements: Borrowers must show that they have no “adverse credit history,” meaning they do not have unpaid debts totaling more than $2,085 and have not experienced bankruptcy, foreclosure or other issues in the past five years. Federal PLUS borrowers with credit concerns can get a loan, though, either by sufficiently explaining any credit issues or applying with a co-signer.
Private lenders, by comparison, perform a much more substantial credit check on all applicants. They can either reject a borrower or charge higher interest rates if the applicant’s credit score, income, cash flow and other factors do not meet their standards.
6. Undergraduate Federal Student Loans Have Low Loan Maximums
Undergraduates can borrow only up to $31,000 in subsidized and unsubsidized loans throughout college if they’re considered financially dependent on their parents, or $57,000 total if they’re considered financially independent. (The government makes a dependency determination based on information in the FAFSA.) Graduate and professional students can borrow up to $138,500 total, including loans used for undergraduate programs.
This may feel restrictive if you need more than that to attend your dream school. But consider limiting your total student loan borrowing to these federal loan maximums. That can help you keep your monthly debt payments affordable when you graduate.
PLUS loans for parents and graduate students have higher limits: You can borrow up to the school’s cost of attendance. But PLUS loans come with higher interest rates (5.3% for 2020-21) and fees (4.228%) than other federal loan types, making it expensive to rely on these loans. It’s best to avoid them if possible. However, they can be a good alternative to private loans if you need more money for school and want access to federal loan benefits.
Unlike federal loans, most private lenders give borrowers the option to choose between fixed and variable interest rates. Variable rates often start off lower than fixed rates, especially during periods of low rates across the board, but they can rise over time.
For the average student, fixed rates are the safer bet. But if you have stable income and plan to pay off a student loan quickly, it can be beneficial to choose a variable rate and pay down the loan while rates are low, avoiding potential increases in the future.
8. Private Student Loans are Safer to Refinance
Student loan refinancing is only available through private companies, which means refinancing a federal loan turns it into a private loan. You’ll lose access to IDR, forgiveness, generous deferment periods and other advantages.
But since private student loans often have fewer protections and higher rates, it’s particularly wise to consider refinancing them once you have a good or excellent credit score and stable income. By refinancing, you have the chance to secure a lower rate, saving you a potentially significant amount of money throughout your repayment term.
which is the more economical student loan to take out a federal loan or a private loan
If you’re considering student loans to help pay for your education, you’re not alone. But the more money you borrow now, the more you’ll have to spend on monthly payments after you graduate.
When deciding between federal or private student loans, there are several things to consider before choosing which option is best for your needs:
Federal loans are generally easier to get than private loans, but they also have more restrictions on repayment and interest rates than private ones do.
Private loans typically offer better rates than federal ones do—but they also come with higher fees and penalties if you miss a payment or go into default on the loan.
If you have good credit or a strong income history, it might be worth going with a private loan instead of a federal one because they’ll likely give you better terms on repayment options and interest rates.
three key differences between federal and private student loans
If you’ve been to college or have recently graduated, chances are you have a student loan. About 43.3 million people have student loans, and 90% of borrowers take out a Federal student loan, according to the US Department of Education. But federal loans don’t always cover all of your college costs, and more borrowers are turning to private loans; according to a new study by LendEDU, 1.4 million people currently have a private loan to pay for college costs.
Experts recommend using Federal loans, financial aid, and scholarships before taking out a private student loan. Understanding the main differences between your loan options will help you determine the best way to fund your education.
Difference 1: How they’re funded
Federal loans are funded by the US Department of Education or private institutions that the government guarantee to pay back in case of default. Federal loans come with more protections, such as flexible payment schedules, lower interest rates and income-based pay-back programs.
Private loans are funded by banks and other lenders, such as credit unions, which means the lenders set the terms and interest rates. Interest rates are typically higher, and there is less flexibility for the borrower.
Difference 2: Interest Rates
The interest rate for federal loans is set by the Federal Reserve. They have fixed interest rates, which means the rate won’t change for the entirety of your loan. In 2017, the Federal Reserve raised the interest rate on undergraduate loans to 4.45%, and 6-7% for graduate student loans.
Private loans can have fixed or variable rates. Variable interest rates can fluctuate depending on the economy, potentially adding large amounts of interest to your loan. According to LendEDU, the average fixed-rate student loan is 9.66%, while the average variable rate is 7.81%, but rates can vary depending on your lender and loan terms.
Difference 3: Getting the loan
You will need to fill out the Free Application for Student Aid (FAFSA) in order to apply for a federal student loan, and you’ll also find out if you qualify for federal grants or other student aid. Your credit will not affect your ability to get a government loan.
There are three different types of federal student loans. A Direct Subsidized loan is given to students with financial need, and the loan interest will be paid by the federal government if you go to school part time, during the six months after you graduate or if you defer your loan payments. You can also receive a Direct Unsubsidized loan, which you are eligible for regardless of financial need, and you are responsible for all interest payments. Finally, you can receive a Direct PLUS loan, for graduate or professional school students.
Your ability to receive a private loan depends on your credit history, which will affect your loan terms and interest rates. You may also need a cosigner, such as a parent, who guarantees he or she will be responsible for your loan if you can’t pay it back. You don’t need to fill out the FAFSA in order to apply for a private loan.
So there you have it; a guide to the complexities of student loans and the private vs federal loan debate. I hope that this information has helped you to make a well-informed choice about your financial future, but remember always that the final decision is ultimately yours. Be sure to read all of the fine print, ask your financial advisor for advice, and be familiar with the pros and cons of each type of loan. Once you do this you will be ready to take on life with confidence in terms of finance.