Private Student Loans vs Federal Student Loans

Choosing what kind of loans you’re going to take out is an incredibly important part of going to college. Since most people can’t afford to pay for their college education out of pocket, student loans are a great way to bridge the gap between what you can afford and the cost of your education. 

However, choosing the wrong type of student loans can have serious financial consequences for you and your family. 

Here’s what you need to know about private and federal student loans so you can choose which type of loan is right for you. 

Pros and Cons of Federal Student Loans

Federal student loans are some of the most common loans, and they’re probably what most people think of when they think of student loans. These loans are made available by the federal government and are held by the federal government even though they are serviced by other companies. 

Federal student loans tend to have some of the lowest interest rates. They are also easier to turn into other kinds of repayment plans, which gives you a little more financial flexibility within the loan. 

However, federal student loans are also usually harder to get taken care of if you have to declare bankruptcy and can have serious consequences for missed payments. 

There are three basic types of student loans you should know about, unsubsidized, subsidized, and Perkins loans. 

Unsubsidized Loans: These loans are available to students and their parents, and there is no need to demonstrate the financial need to get them. These loans do accumulate interest while you’re in school, though you won’t need to start paying the loan until 6 months after you leave school.

Subsidized Loans: Subsidized loans are similar to unsubsidized in that you won’t need to pay on these loans until after you leave school, and they are usually available to both students and their parents. However, subsidized loans don’t accumulate interest while you’re in school. Usually, these loans are offered based on some financial need. 

Perkins Loans: Perkins loans are rare and only typically available in cases of extreme financial need. They are only made available to students but are available for both undergraduate and graduate work. 

In order to qualify for any federal student loans, you need to fill out the FAFSA, including both your financial information and your parent’s financial information until age 24. After age 24 only your financial situation is considered. 

In some cases, parents may need to take out loans on their child’s behalf before the child is eligible for federal student loans in their name. 

Pros and Cons of Private Student Loans

Private student loans are also available to students and their parents, but they don’t have the requirements of a federal loan. 

For instance, students may be able to take out private loans in their own name without their parents having to take a loan, even if their parents would need to take a loan under federal standards. 

These student loans also usually don’t require repayment until after you’re out of school for a certain amount of time, but typically accrue interest while you’re in school. 

One advantage of taking out private student loans is that you can use private loans in addition to federal loans. That way you can still pay for school even if your federal loans don’t cover the costs. You can also use private student loans as a way to get more money to pay living expenses and other costs associated with being a student. 

It can be important for some majors, especially majors that require outside supplies like art concentrations, to have access to these loans to complete their schooling. 

However, interest rates, servicing fees, and even the length and terms of your private student loans can vary a lot. Federal loans are designed to be paid off in 10 years at a set interest rate unless you choose a different repayment plan. 

Private loans are different. Private loans can have a variable interest rate, increase payment cost over time, and other variables that make them harder to predict. It’s also often harder to move these loans into an income driven repayment or other options that make them financially easier to manage. 

It’s also common for private loans to require a cosigner for students, especially if you’re going to college straight out of high school. That likely means that your parents are still on the hook if you don’t pay your student loans, even if they didn’t take out any loans for your education.