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Comparing Federal and Private Student Loans

Lynnette Khalfani-Cox, The Money Coach by Lynnette Khalfani-Cox, The Money Coach
in Student Loans
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Seven out of 10 college graduates in the U.S. have student loans, and if you’re one of them – or if you’ll need to borrow soon for higher education – you should know your loan options.

In the student loan market, there are two main types of loans: federal student loans and private student loans. If you asked most people, even those who actually have college debt, they probably couldn’t tell you what distinguishes these loans or what the pros and cons are for each kind of loan.

But there are, in fact, distinct differences. Three of the key differences pertain to loan costs, loan flexibility and loan size.

Student Loan Costs, Loan Flexibility, and Loan Size

On the cost front, federal student loans are usually your best bet for student loans with lower fees and lower interest rates. That’s because federal loans typically have lower “origination” charges and other fees than do private student loans. Federal loans are also fixed rate loans, which make your payments more predictable.

Congress sets the rates on federal loans each year, and the rates change every July 1st. By contrast, most private loans are variable rate loans, and market forces determine the rates. Since federal loans are usually cheaper, that’s why most experts recommend that you first tap into federal loans for college before you turn to private loans.

Federal loans are a bit more flexible than private loans as well, in terms of federal loans giving you more options for temporary suspension of payments, reduced payments – or even non-payment once you get out of school.

For example, the U.S. Department of Education gives federal student loan borrowers the right to forbearance, loan deferments and even loan forgiveness under certain scenarios. You can have student loans forgiven for public service work, disability, and other circumstances. That latter category, loan forgiveness, isn’t a benefit you’ll readily find with private lenders.

Finally, federal loans can differ tremendously from private loans when it comes to loan size. With federal loans, the government limits the amount of borrowing you can do in any given year. The feds also impose a cap on your total federal loans – and that’s true for dependent students and independent students alike. Private loans have no loan limits – other than the fact that you can’t borrow in excess of a college’s cost of attendance.

Check out this video for more details about how much you can borrow with federal student loans and a few other pointers on the differences between federal and private student loans.

Tags: federal student loansprivate student loans
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Lynnette Khalfani-Cox, The Money Coach

Lynnette Khalfani-Cox, The Money Coach

Lynnette Khalfani-Cox, The Money Coach, is a renowned financial expert, author, speaker, and media personality, empowering people to achieve financial success.

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