Hurray! You are a college graduate and are in the real world! You landed a job too! Double the hurrah! You are officially adulting now! This includes making your student loan payment on time. If not you are bound to carry along a lifetime debt. Experts recommend that you begin the process of paying back student loans within six months of graduation. Therefore, it’s vital that graduates know exactly what type of loans they have. There are two types of student loans, federal and private. So let’s look at the differences in Federal vs Private student loans.
Federal vs Private Student Loans – A Quick Snapshot
A federal loan, which is either subsidized or unsubsidized, is based on the student’s financial need and comes with a fixed interest rate. A private loan, on the other hand, is not funded or subsidized by the federal government. Instead, they are funded by banks, credit unions, or other types of lenders. In order to avoid defaulted student loans, let’s look at Federal vs Private Student Loans.
Federal Student Loans
- Prior to each school year, the government informs every school the amount of federal money it will receive to allocate to its students.
- Federal loans come with fixed interest rates.
- Students need to reapply for their federal loans every year.
- There are three types of federal loans:
- Stafford loans, which are capped at $31,000
- Perkins loans, which are capped at $27,500
- PLUS loans; Parent PLUS or Grad Plus loans
- A subsidized Federal Loan is based on the student’s financial need when applying through Free Application for Federal Student Aid (FAFSA). With this loan, the U.S. Department of Education pays for the interest acquired while the student is in school. These loans allow a six-month grace period upon graduation.
- An unsubsidized Federal Loan is when students begin acquiring interest beginning on the date of their first loan disbursement. Although they are accruing interest, students are not required to pay the interest until graduation. The amount acquired is added to the principal loan amount.
Advantage: Federal loans include benefits such as income-driven repayment plans and fixed interest rates.
Disadvantage: The amount a student can borrow is set by Congress, so the loan may not cover the entire cost of tuition.
Private Student Loans:
- Private loans have variable interest rates, meaning that the rate can change at any time, making it harder to pay off.
- These loans do not have special programs for unemployed or low-income borrowers.
Advantage: The total amount is not limited which means a student can take out as much as they need to cover the cost of tuition.
Disadvantage: Private loans are generally more expensive than Federal loans and interest rates can often change. Eligibility depends on the student’s credit score which is why most lenders require a cosigner.
If you are looking for assistance with understanding federal vs private student loans or repaying your debt speak with a certified counselor at ACCC today! Call 800-769-3571.