Federal and Private Student Loans. What's the Difference?

Among the differences between these two important student loan programs are:

Federal student loans:

• Usually have lower interest rates
• Often include federally-subsidized interests
• Provide options to postpone payments
• May have a longer repayment term
• Offer easier credit requirements
• Generally require completion of FAFSA
• Usually require school certification
• May offer borrower benefits in the form of interest rate discounts or rebates

Private student loans:

• Usually don't require completing the FAFSA
• Send the funds directly to you, not your school
• Can help when federal student loans aren't enough to fund your entire education
• Have interest rates and fees that are determined by the lender and often depend on your credit rating
• May require the borrower to have a cosigner, if the student does not qualify alone
• May or may not have deferment and forbearance options depending on the lender
• May offer borrower benefits in the form of interest rate discounts and rebates

After you've checked for free funding available to you, if you decide you'll need additional assistance paying for your education, it's time to look to federal student loans. These are long-term loans with low interest rates designed exclusively for those needing money to meet the costs associated with education.

Federal student loans are the largest source of student loans around. They have very attractive terms when compared to most other borrowing options - such as lower interest rates, federal subsidized interest possibilities, options to postpone payments, longer repayment terms, easier credit requirements, etc. You will need to complete the Free Application for Federal Student Aid (FAFSA) before you can apply for federal student loans.

You should always plan to look for federal student loan options before investigating private student loan sources, because these student loans are sometimes more difficult to obtain and can often end up being very costly to you in the end. Private student loans are designed to supplement federal student loan programs and are available from schools, banks and education loan organizations. Private student loans are also known as alternative loans and the terms often vary considerably based on the lender and borrower credit histories. Here are some important things to remember about the differences between federal student loans and private student loans:

• Private student loans may require a borrower to have reasonably good credit, as well as have a co-borrower/cosigner in most circumstances.
• Interest rates and fees are determined by the lender and usually depend on the borrower's or co-borrower's/cosigner's credit score, unlike Federal Stafford Loans which have standard rates and fees.
• Private student loan programs may or may not offer deferment options and forbearance of loan payments in certain circumstances.
• Private student loan programs may offer borrower benefits. These could be in the form of interest rate discounts or rebates to encourage students to make timely payments, make automated payments, or to agree to enroll in online-based billing and servicing. Remember that these benefits may differ from your Stafford loan borrower benefits even if you are using the same bank for both student loans.
• You should be conservative and borrow wisely.

Remember: Any student loan has to be repaid — even if you don't finish school, are unhappy with the education you received or are unable to find a job, or you're making less money than you planned. So borrow wisely now, because the amount of money you borrow now will have long-term effects that can influence your lifestyle!

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