The Advantage Of Federal Student Loans Over Private Ones

Student loans fall under two broad categories—federal student loans and private student loans. As the name suggests, the federal government offers federal loans. A private student loan is offered by private lenders such as banks, schools, credit unions, and state agencies.

There is a huge difference between these two types of loans. Federal student loans offering several benefits that private student loans don’t. Unfortunately, many students do not take the time to understand the intrinsic differences between these two loan types. They then apply for private loans without exhausting the full amount of federal loans available to them. This can be an expensive mistake, resulting in having to pay thousands of dollars more in student debt.

Take a look at the many advantages that federal student loans offer over private loan alternatives.

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Interest Rates On Federal Student Loans Are Considerably Lower

The interest rates on private loans can be two or even three times higher than federal loan interest rates. The exact increment depends on your credit score as well as your co-signer’s credit score.

Another drawback with private loans is that the interest rates can be variable (including when you refinance) and can go even higher if the Federal Reserve increases the interest rate benchmark, substantially increasing the total amount you have to repay. On the other hand, federal loans have fixed rates. The rates stay the same during the entire term of your loan. Thus, you know exactly how much you will owe at any point.

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Federal Student Loans Are Available Without A Credit History

You don’t need to get a credit check to apply for federal student loans, with the exception of PLUS loans. Students can apply for federal loans by filling out the FAFSA and CSS or Free Application for Federal Student Aid. These loans are available to any enrolled undergraduate with financial need. Making the payments on time can help students establish a good credit record.

Applying for a private loan is not so simple. In most cases, you can apply for private student loans independently from banks, a college credit union, and other financial institutions only if you have a credit history. At most, private loans may offer lower interest rates and more options if you have a good credit score. However, most students looking for college loans are not likely to have an established credit record. It makes private student loans a highly expensive option.

Federal Student Loan Payments Can Be Postponed For Up To 3 Years

If you are in a temporary financial bind and cannot afford your scheduled loan payments, federal loan programs offer two postponement options—deferment & forbearance.

Deferment allows you to postpone or lower your payments for a total of three years. The interest does not accrue during this period but you must meet certain criteria to be eligible for deferment. You qualify for deferment if you are engaged in an internship or residency, enrolled in a graduate fellowship program or teaching in a teacher shortage area.

If you do not meet the requirements for a deferment, you can get apply for forbearance. This allows you postpone payments for three years, one year at a time. However, in this case, the interest will continue to accrue during the entire period of forbearance.

There are no deferment or forbearance options with private student loans.

Federal Loans Offer Forgiveness Opportunities

You may qualify for student loan forgiveness to have a large portion of your loans forgiven if you are employed in some type of public service such as a nonprofit or the government or if you participate in an income-driven repayment plan.

Private loans, on the other hand, do not offer any forgiveness opportunities. You are responsible for repaying the full balance.

Federal loans can be consolidated even without having good credit

If you have multiple federal loans and are juggling payments for separate bills to different loan servicers, you can choose to consolidate a loan into one payment even without having good credit. Federal consolidation may not save you money as it calculates the weighted average of your prior interest rates but it will help to simplify your repayments.

Private loans also offer consolidation and refinancing options, which may reduce your overall rates but they require a credit check. You must have good credit to get

The Interest On Deferred Subsidized Federal Loans May Be Paid By The Government

Under certain circumstances, undergraduate students with greater financial need could qualify for federal direct subsidized loans. In this case, the government pays the interest while the subsidized loan is deferred while you are in school and also of you take a break from payments.

Private student loans are not subsidized and do not offer this benefit. You are responsible for paying the interest on your loan. Interest starts accumulating on private loans as soon as you receive the loan.

Federal Loans Don’t Go Into Default As Quickly

If you fall behind on your federal loans, you will generally get more time to get your payments on track. Failure to pay is not reported to credit bureaus and your loans are not “delinquent” until you have missed 3 months of payments. After 9 months of missed payments, you’ll be defaulting on your loans and the government could deduct money from your paycheck or tax return to recover that debt.

Private loans are not as generous. Some private loans go into default 1 day after you miss a payment. Private lenders may not have as much power as the federal government does to recover owed money but missing one or more payments affects your credit severely. That will make it even more difficult for you to take out any other loans or even get an apartment in the future.

Given the many benefits federal student loans offer, experts recommend that students first exhaust the full amount of federal loans available to them. Only consider private student loans if you need funds over and above that amount.

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