Monthly Archives: August 2014

Key Differences Between Federal and Private Student Loans

Student loans can be accessed via either a federal loan, which can take a number of different forms, or through private lenders that can include banks and credit unions. There are a number of advantages and disadvantages that exist with both forms of student loans, which should be weighed before an individual makes a decision on which form of loan they wish to take out.

The application process for student loans offered by Federal agencies is usually simpler to complete than the application process used by banks and credit unions. Undergraduate student loans, usually referred to as a Stafford loan is means tested, but does not include a credit approval process and is available to any legal resident of the United States. In contrast, a bank, credit union or other private loan provider will often seek credit approval for a student loan and often require a parent or guardian to act as a cosignatory on any approved loan. Unlike private student loans, Federal agencies in the US also offer a number of loan options for those seeking degrees in different fields, such as loans designed specifically for those seeking a nursing qualification.

One of the major differences between Federal and private student loans is the interest rate charged on the available monies. Stafford and other Federal loans are usually available at a fixed rate of interest that is locked in lower than the average interest rate charged by private financial institutions. Many private student loans are locked in at a low rate for a specific number of years, if the loan is still active when the low interest rate period is complete the interest rate will often rise dramatically.

Federal student loans also offer a number of advantages when an individual is required to repay their loan, which includes the chance to defer payment for a year when financial difficulties strike and repayments are difficult to make. A Federal loan that is deferred usually does not have interest added throughout the deferment meaning the total to be repaid does not rise. Usually private lenders are willing to work with a borrower falling on difficult financial times, but will still expect some form of repayment to take place over the entire life of the loan. Federal loans also offer an advantage in the the fact that in many instances repayments will be made at a level linked to earnings and will not usually until the individual earns more money.

Deciding between these two forms of loans is a difficult decision to make, a fully repaid private student loan will lead to a higher credit level and the chance to take out more and more loans. However, a Federal loan offers advantages in terms of interest rate and repayment options.