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Federal Student Loans vs Private Student Loans

If you’re planning to take out a student loan to pay for college, you’re in good company. In 2013, nearly 70 percent of high school graduates in the U.S. take out at least one loan to pay for tuition, and they all had to confront the choice between a private loan and a federal government loan. Read on to find out the differences between these types of loans and how they can impact your decision.

Borrowing Limit

Counselors and industry experts recommend that you seek a student loan from the federal government first before engaging a private lender, so the amounts you can get from these types of loans will probably be the top concern for you.

Federal loans come in two varieties: the Federal Perkins Loan Program and the William D. Ford Federal Direct Loan Program. You can borrow up to $5,500 per year from the Perkins Program and between $5,500 and $12,500 per year from the Direct Loan Program. While this covers the cost for many public universities and community colleges, you’ll likely face a shortfall if you plan to attend a more expensive school. In contrast, private loans typically have higher borrowing limits.

Credit History Concerns

In most cases, you won’t need to undergo a credit check to take out a federal student loan, unless it’s through the PLUS Loan subset of the Direct Loan Program. You also typically won’t need a co-borrower for government loans, so you won’t be putting anybody else’s credit at risk.

Private lenders always require a credit check and frequently require co-borrowers since you’re not likely to have much of a credit history as a new high school graduate.

Interest Rates

Federal student loans feature fixed interest rates that are usually in the range of three to eight percent. In contrast, private student loans may have variable interest rates that can change over time and have no inherent limit to how high they can go. Interest rates in the double-digits are common for private loans, and many lenders even assess rates of 20 percent or more.

Student Loan Repayment

Government regulations mean that federal student loans have much more favorable terms for repayment in comparison to private loans. A government loan will guarantee the opportunity to apply for a forbearance or deferment if you have financial difficulties that temporarily prevent you from making your monthly loan payments. You’re also guaranteed access to several repayment options, one of which is directly tied to your income level, so a low income automatically means low loan payments.

Private lenders are generally not required to offer any of these guarantees about repayment options and may not take your financial situation into consideration when deciding whether to provide you with a forbearance or deferment.

Student Loan Takeaways

While it’s theoretically possible to find a great deal from a private lender, the general rule of thumb is that you should stick to federal loans whenever possible. The terms and costs for federal loans are usually better than private options and afford you protections against hard times that aren’t guaranteed with private lenders.

For more information on student loans, also see:

Student Loan Help and Information

Student Loan Consolidation

College Budgeting

Student Loan Statistics

Types of Student Loans

Student Loan Repayment Plans

Applying For Student Loans