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Comparing Federal Loans vs. Private Loans

When you just need cash for school, thinking about all the nitty-gritty details of loans can be too daunting to deal with. Just a little bit of research, however, can help you save thousands on one of the biggest and most important investments you’ll ever make.

Before you hand in those applications, let’s break down the two different loan types: federal and private loans.

What’s the difference between federal and private loans?

Federal Loans (also called public loans) are loans that come from the federal government. In this case, the government is the lender.

Private Loans are loans that come from a private company, like a bank, credit union, state agency, or a school. In this case, the private company is the lender.  The bank or lender – not the federal government – sets interest rates, loan limits, terms, and conditions of private student loans.

Federal vs. Private Student Loans

The main thing to consider when comparing private loans vs. federal loans is that private loans tend to be less flexible when it comes to interest rates, repayment, and qualification, which can be an issue if you have trouble finding work after graduation and cannot repay the loans as easily as you thought.

Federal loans are available to any student enrolled at least half-time in school. In order to get a private loan, you must get approved, which involves proving your ability to pay back a loan, either with a cosigner or by providing your credit history.

Here are the major differences between federal and private loans:

Common Question Private Student Loans Federal Student Loans
Common Question "Do I have to repay my student loans while in school?"
Private Student Loans Likely
Federal Student Loans Not Likely
Common Question "What's the interest rate like?"
Private Student Loans Interest rates are variable and can climb up to 18%.
Federal Student Loans Interest rates are fixed and typically low.
Common Question "Will I need a credit check to get a loan?"
Private Student Loans Most likely-- the terms of the loan will depend on credit score and other factors.
Federal Student Loans No, you do not need a credit check for most loans. You will need a credit check for a PLUS loan, which is available to parents, graduates, and professional students.
Common Question "Do I need a co-signer to get a loan?"
Private Student Loans Most likely.
Federal Student Loans No.
Common Question "What if I have trouble paying back my loan?"
Private Student Loans Private loans may not offer forbearance or deferment options.
Federal Student Loans You can file for deferment or find an income-based repayment plan.
Common Question "Could a portion of my loans be forgiven if I work in public service?"
Private Student Loans No.
Federal Student Loans Yes, there are loan forgiveness programs available.
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How do I get a federal loan?

First and foremost, you must fill out your FAFSA, or your Free Application for Federal Student Aid. It is a form available through the U.S. Department of Education that determines your financial need.

The federal government provides more than $120 billion in grants, loans, and work-study funds each year. The purpose of the form is to calculate your expected financial need based on your current financial situation. Completing the FAFSA will unlock federal sources of funding to contribute to your tuition, room & board, books, and supplies. Many states also use the FAFSA to determine your eligibility for state-specific aid like grants.

Here’s what happens after you fill out the form:

Your state financial aid organizations and each of the colleges that you listed on your FAFSA will receive a copy of the financial information you included on your FAFSA. The federal government will calculate your EFC, or Expected Family Contribution, based on what you provide to calculate your expected needs.

If you are admitted to a college and you included that college on your FAFSA, you will receive an award letter that includes any combination of federal loans, grants, scholarships, or work-study.

What kinds of federal loans will I find in my award letter?

There are three types of federal student loans:

  1. Direct Subsidized Loans: Based on need, and the interest is paid while you’re in school at least half-time, and for the first six months after graduation
  2. Direct Unsubsidized Loans: No requirement for financial need, and you are required to pay interest on your loans during school and beyond
  3. Direct PLUS Loans: Available to graduate or professional students enrolled at least half time in school

As an undergraduate, you would most commonly see a combination of direct subsidized and direct unsubsidized loans. The unsubsidized loans are less favorable since you’d be obligated to pay interest on your loan while in school. Public loans, in general, are favorable because of their fixed low-interest rates, so the interest rate stays the same throughout the life of the loan.

Federal loans are also favorable because the government offers repayment plans, deferment options, and forgiveness programs: You have the option to adjust your monthly payments based on your income, defer your loans because of economic hardship, or work in a public service position that offers partial loan forgiveness.

How do I get a private loan?

It’s wise to first exhaust your options for scholarships, grants, and federal aid before you turn to private loans for assistance.

If you are still on the hook for tuition money, you can certainly check out private loan options by searching for lenders online or by contacting a bank or credit union.

Our partner, Edvisors, allows you to compare loans available to you based on your college or university.

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Author: Alex Caffee

Former Marketing and Business Analyst at Niche. Dessert aficionado. Currently living and working in New York City.