When it comes to financing your college education, you’ll likely be offered federal and private loans as part of your financial aid package. So, what’s the difference? Federal student loans are funded by the federal government, while private loans are provided by another lender – such as a bank, credit union, state agency or school. Typically, federal loans will give you more benefits and flexibility – so consider these first.
Here are 11 important advantages federal student loans have over private loans:
ADVANTAGE 1: Applying for the four types of federal student loans is easy
There are four types of federal loans. Applying for any of these federal student loans is typically straightforward and simple.
“By submitting a FAFSA, students are also applying for federal loans. There is no separate application, no credit check, and no co-signer is required,” explains Alana Mbanza, the FAFSA Lady. “The exception is the Parent PLUS Loan, which does require a parent credit check.”
ADVANTAGE 2: You won't have to repay them until after you graduate
If you go the federal route, you can focus on school without worrying about a payment plan. You won’t have to start repaying your federal student loans until you graduate, leave school or change your enrollment status to less than half-time.
ADVANTAGE 3: They have a fixed interest rate
The interest rate on federal loans is fixed and typically lower than both private loan and credit card interest rates. Private loan interest rates are generally variable, which means they can spike – sometimes higher than 18%.
“Currently, the interest rate for federal student loans is 3.76%,” says Mbanza. “This is generally much lower than the interest rates for private loans, which vary depending on the student’s and parent's credit history. Lower interest rates mean less money owed over time.”
ADVANTAGE 4: You may qualify for a subsidized loan
If you need a lot of help to pay for school, you’ll likely qualify for a federal subsidized loan. And if you need to defer payment on a subsidized loan, the government will pay the interest during deferment.
“Students who submit a FAFSA and demonstrate financial need may be offered a Direct Subsidized Loan. Subsidized means that while the student is in school, the government pays the interest on the loan,” Mbanza explains.
ADVANTAGE 5: Most don't require a credit check
Especially if you’re applying for loans right out of high school, you might not have much of a credit history. You can only take out private loans if you have a credit history, and you may not qualify for many unless you have a high credit score. Federal loans are available to any enrolled undergraduate student with financial need. And, federal loans can actually help you build good credit if you pay them back consistently on time.
“There are a number of benefits of federal student loans. They allow students with little-to-no credit history to begin building a credit history and take some limited responsibility over their own college costs,” says Shannon Vasconcelos, director of college finance and a college coach at GetIntoCollege.com.
ADVANTAGE 6: You won't need a co-signer
Private loans usually require a parent or guardian co-signer who will be responsible for the loan balance if you’re unable to pay. Because federal loans aren’t credit-based, they don’t have this requirement.
ADVANTAGE 7: You'll have the opportunity to consolidate
It’s easy to consolidate your federal loans into one, easy-to-remember payment. Consolidation uses a weighted average of your interest rates and – again – it’s not credit-dependent.
ADVANTAGE 8: Repayment issues? You can postpone or lower payments
If you’re facing a financial hardship and can’t afford your payments, federal loan programs offer two temporary options for postponement. Deferment lets you postpone or lower payments for a total of three years. Forbearance lets you stop payments for up to a year at a time. Learn more about these options here.
“Federal student loans offer numerous repayment plans, which many private loans do not,” adds Susie Watts, a college admissions consultant at College Direction.
ADVANTAGE 9: There is no prepayment penalty
Some private loans make you pay a penalty if you pay off the loan before the term, as the lender won’t earn all the interest income you’d otherwise pay. Federal loans do not come with these penalties.
ADVANTAGE 10: You may qualify for loan forgiveness
Private lenders do not offer opportunities for loan forgiveness. If you have federal loans, you may be able to have some or all of your loan debt canceled. Loan forgiveness is possible if you work for a nonprofit, certain government sectors or low-income school districts. The Public Service Loan Forgiveness program forgives federal loans after 10 years and Perkins Loans can be forgiven even sooner.
ADVANTAGE 11: If you pass away or become disabled, your loans will be canceled
If you die or become permanently disabled, the government won’t require repayment of your federal loans. This is usually not the case with private loans. “Federal student loans are cancelled in the event of the death or permanent disability of the student, or the parent borrower, in the case of the Federal PLUS Loan,” says Vasconcelos.
Borrow smart. Federal student loans = bigger benefits
It’s safe to say that, in most circumstances, federal loans are the smart choice for student borrowers. Learn more about the types of federal loans available. And, don’t be fooled by these private loan myths.