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Understanding Federal vs. Private Student Loans

Ah, college. It’s a time when life’s possibilities are seemingly endless. True, college is a time of opportunity and growth, but all of that comes at a price. Most American college students are not in the financial position to pay for their education out of pocket, and therefore it becomes necessary to borrow money to secure the necessary financing to get a degree.

According to the latest statistics from The Institute for College Access & Success, 66 percent of graduates from public institutions leave college with student loan debt. Those attending private institutions are even more likely to have student loan debt upon graduation — approximately 75 percent. And 88 percent of students attending for-profit colleges graduate with student loan debt.

There is currently more than $1.48 trillion owed in student loan debt, spread across some 44 million borrowers. The average Class of 2016 graduate left college saddled with $37,172 in loan debt. And since student loans are a necessity of higher education for most, it’s important to understand the differences between the major types of student loans available and how they work.

Federal student loans

Stafford loans, Perkins loans, and PLUS loans fall into this category of government-funded loans. Stafford and Perkins loans are paid directly to the student. These are good options for many students because they offer some of the lowest interest rates and good options for repayment. Unlike private or bank loans, Stafford and Perkins loans do not require a review of your credit report.

Stafford loans are more popular than Perkins loans and there are two types: subsidized and unsubsidized. This means students can use them whether or not there is a financial need. If a Stafford loan is subsidized, meaning they’ve proven a financial need, the student will not be responsible for making any payments until after he or she has graduated.

Interest rates on these loans are currently 4.45 percent. Unsubsidized Stafford loans make the borrower accountable for paying off the interest and annual limits range from $5,500 to $12,500.

Perkins loans were designed for students that can prove an extraordinary financial need, and are more difficult to qualify for. Interest rates on Perkins loans are currently 5 percent and interest is paid by the government as long as a student is enrolled in school. Perkins loans do not have an origination fee like other government-backed loans.

PLUS Loans differ from the other federally backed loans in that they are made available to parents of students that are enrolled at least half time, or graduate and professional students attending eligible post-secondary institutions. This means that the parent is the responsible party, and the child has no obligation to repay it, nor will it impact their credit. The current interest on PLUS loans is 7 percent.

Private student loans

Private loans are often sought when students still can’t meet the financial obligations of their college education even with money from federal loans. These loans are more like personal loans in that credit history is the primary factor for qualifying borrowers.

Interest rates are typically higher than federal loans and they can either be fixed or variable. Because they are not subsidized, some private loans require payments while the student is still attending college. Deferment and forbearance options are far more limited on these loans as well.

Which type of student loan should you choose?

The main difference between federal student loans and privately funded student loans is the overall cost and the process for qualifying and repaying the loans. Students applying for private loans will have to submit to a credit check, which will determine eligibility. Those students who seek federally funded loans will not need a good credit standing in order to qualify. Generally, a credit score in the mid-600 range is necessary.

No matter which option is chosen, it’s important to consider the long-term picture to ensure that payments will be manageable whenever they come due and that the loan will not end up being a burden that damages the borrower’s credit score. Make sure you understand what the interest rates are and whether or not they are fixed or variable. All federal loans carry fixed rates, while private loan interest rates are often variable, and therefore, higher.

If you are in need of credit repair in order to increase your chances of qualifying for a student loan, Your Business Needs can help. We offer a free, personalized credit consultation. Contact us today at 347-619-3410 to get started on repairing your credit.

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