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Compare federal vs. private student loans
Compare the good, the bad and the situational of these two student loan options.
It’s always nice seeing those thick college acceptance letters in your mailbox. But getting into a school doesn’t always mean you’re going to be able to pay for it. Now more than ever, student debt has become a part of the American college experience.
You’ve probably heard of federal student loans. But are they really better than their private counterparts? The short answer is: It depends.
We break down when you should choose federal, when you might want to choose private and the benefits and drawbacks of each.
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- Min. Credit Score Required: 680
- Min. Loan Amount: $1,000
- APR: Starting at 4.2% with autopay
- Requirements: Enrolled at least half time in qualifying US educational program, ages 18+ or apply with cosigner
What’s the difference between federal and private student loans?
Federal student loans are funded by the government. Depending on your education level and financial need, you can apply for direct subsidized loans, direct unsubsidized loans, direct PLUS loans (for graduate students and parents) or Federal Perkins Loans.
How much you receive is determined by your school, and you can use your loan toward tuition, fees and education-related expenses while you’re a student. The government determines your interest rates, but your financial history rarely comes into play. And they typically come with a grace period before you’ll need to start making payments. However, the amount you can take out is limited.
Private student loans come from a private lenders such as banks, credit unions, state agencies and even schools. Students typically turn to these lenders after they’ve reached their borrowing limit with federal loans.
With private loans, you have fewer restrictions as to how you can use your money, using it for postgraduate expenses, such as bar preparation courses or residency-related expenses.
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Snapshot: How federal and private student loans compare
| Federal student loans | Private student loans | |
|---|---|---|
| Purpose | Education-related expenses directly related to school | Education-related expenses, including some postgraduate costs |
| Who it’s best for | Any eligible student | Students who’ve already used up their federal loans, can’t qualify for federal loans or have postgraduate expenses, like bar study courses or residency relocation |
| How disbursement works | Funds go directly to your school, which forwards to you any remaining funds after paying school fees | Funds go directly to your school, which forwards to you any remaining funds after paying school fees |
| Eligibility requirements | You must:
| You or your cosigner must:
|
| APR | Fixed rate of 4.53% to 7.08%, depending on the student and loan type. Congress set the rates for new student loans each year, which change on July 1. | Varies, though APRs can reach 18% or more, depending on the lender |
| Cosigner | Not required for most federal loans, with the exception of Direct PLUS Loans | Required for students who are younger than 18 and don’t meet the lender’s credit, income or legal residency requirements |
| Academic requirements | Satisfactory academic progress while enrolled, based on your school’s standards | None |
| Lifetime limits |
| Varies by lender, though many let you borrow up to 100% of your school’s tuition and fees |
| When repayment starts | Usually six months after leaving school, though some come with the option of starting full or interest-only repayments immediately | Six months after leaving school, or immediately with full or interest-only repayments |
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Updated September 17th, 2019
What are the benefits of federal and private student loans?
Federal student loans
Federal student loans are usually a student’s first choices. Even private lenders like Sallie Mae suggest that students apply for federal loans before considering private options. They typically have lower, fixed interest rates than private lenders are able to offer.
If you get a subsidized loan — only available to undergrads — the government pays your interest while you’re still in school. You also won’t need a credit check, making it ideal for students who don’t yet have a credit score and can’t find a cosigner with good credit.
But the real benefits of federal student loans come after graduation, including:
- Federal forgiveness programs. Going into public service, education, health care or the military? You may be eligible to have a portion of your loan forgiven.
- Tax benefits. The interest you pay on your loans is tax-deductible.
- Repayment plans based on income. You have the option of determining payments based on how much you can afford.
- Extended terms. Depending on your repayment plan, you could get a loan term as long as 30 years. (Keep in mind that making smaller payments over time means you’ll end up paying more in the end.)
Federal student loan rates
Congress changes the interest rates on federal loans every July. On July 1, 2019, rates went down from 5.05% 4.53% on direct loans for undergraduates. Rates on direct unsubsidized loans for graduate students went down from 6.6% to 6.08%. And Direct PLUS loan rates went down from 7.6% to 7.08%.
Since federal loans come with fixed interest, you don’t need to worry about paying these rates on loans you already have. The new rates only affect federal loans issued between July, 1, 2019 and July 1, 2020.
Private student loans
Private student loans are often designed to step in and cover expenses when federal student loans fall short. They’re there for you when you can’t quite scrape together enough federal loans and scholarship money to pay for your dorm room. Or when you’ve just finished med school and can’t afford the costs of relocating for your first residency.
What’s more is that it’s not hard to find one that’ll give you a grace period before you have to start making payments — sometimes longer terms than federal loans offer. And while federal loans tend to come with low interest rates, they’re not always lower than what private lenders offer, especially for graduate students.
What are the drawbacks of federal and private student loans?
Federal student loans
The main problem with federal student loans is that they come with a cap. In the face of ever-increasing higher education costs, they frequently aren’t anywhere near enough to cover basic costs.
Here’s how federal student loan limits compare to the average annual cost of college for the 2016–2017 academic year:
| Type of degree | Avg annual tuition & fees: In-state public college | Avg annual tuition & fees: Out-of-state public college | Avg annual tuition & fees: Private college | Federal student loan limit |
|---|---|---|---|---|
| Dependent undergraduate | $20,090 | $35,370 | $45,370 | $31,000 |
| Independent undergraduate | $20,090 | $35,370 | $45,370 | $57,000 |
| Graduate and professional students | Varies | Varies | Varies | $138,000 lifetime limit (including undergraduate degree) |
Sources: https://www.studentaid.ed.gov/sa/types/loans/subsidized-unsubsidized & https://trends.collegeboard.org/college-pricing/figures-tables/average-published-undergraduate-charges-sector-2016-17
Only taking out federal loans just isn’t going to do it for students with limited scholarships or other means to pay for school.
There’s also a limit on how many subsidized loans you’re able to take out. This means that you won’t always be able to take advantage of the low interest rates and other perks that come with the best loans.
And you’ll want to be careful with setting your term limits after you graduate. It’s tempting to go with the lowest possible payment over the longest possible time, but you’ll end up paying more in interest over the life of your loan.
Private student loans
Any disadvantages of private student loans are primarily the result of them acting more like your typical personal loan. They can come with high interest rates and unexpected fees, and your payments won’t have anything to do with how much you earn.
One major problem that students could run into with private loans: Rates and terms are partially determined by a credit check. Many students don’t yet have a solid credit score, which means you’ll need to find a cosigner with good credit. If you can’t find one, you’re stuck with high interest rates and fees that could lead to potentially unaffordable payments after you graduate.
Which is the better option for me?
Say you’re just starting college and your parents are able to cover a good part of your tuition — so much that your school doesn’t see any reason to give you a scholarship. Because your needs are well under federal student loan borrowing limits, you’ll may want to go for them first.
But what happens after you finish college, and then law school, and then reach your lifetime borrowing limit? You still need to take the bar before you can start that job you’ve lined up in September, but bar study courses cost thousands of dollars that you don’t have. Here’s where you might want to consider taking out a private student loan.
Bottom line
Many students who can’t afford to pay for college out of pocket take out federal student loans to cover the basics. If you’re have remaining education costs that aren’t covered by federal loans — or simply need to borrow more than the limit — private student loans can help you out of that pinch.
But before you make any borrowing decisions, it could be a good idea to talk to your school’s financial advisers and compare all of your student loan options on your own.
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