Federal vs. Private Student Loans
A common question from students looking to pay their tuition bill is “Should I use federal or private student loans to pay for school?” Students should always get federal student loans first, and find private student loans to fill any remaining gaps in funding. Below we list details about what makes these loans different.
- Federal Student Loans –Federal loans carry fixed interest rates and usually have a lower total cost than private student loans that have variable rates. If you need to take out student loans to pay for school, start with federal loans first.
- Note – Federal loans can’t be accessed without completing the FAFSA, or Free Application for Federal Student Aid.
- Private Student Loans – Only after you have exhausted your federal loan options, should you consider private loans as an alternative funding source. Compare private student loans when shopping to find the best match for your needs.
How can I find these different loans?
- Federal Student Loans – As of July 1, 2010, all federal student loans can be attained through your college via the Direct Lending Program.
- Note - Currently, two-thirds of college students take out student loans and the average debt at graduation is $23,000. A new law was signed by the Senate in March that is meant to help US students better afford college and be prepared for the modern world without the burden of excessive debt. So how will this affect you?
- As of July 1, you will apply for all federal loans directly through your college. All lending from the bank-based Federal Family Education Loan Program (FFELP) will be transferred to the Direct Loan Program. Private banks will no longer lend government-backed loans to students.
- Pell Grant funding will be increased. The government will use $61 billion in savings over 10 years to help boost the Pell Grant Program and other education priorities. The Pell Grant currently helps scores of students afford and attend college.
- Student loan borrowers’ payments will be capped at 10% of their income. This means that the burden of debt on recent graduates will be lower as $1.5 billion will go to income-based repayment programs for those with low income as of 2014.
- Increased aid would be directed to historically black, Hispanic, and tribal colleges. These schools will receive an additional $2.55 billion over the next 10 years.
- Private Student Loans – Comparing private student loans is the best way to find the right student loan for you. You should compare across variables that matter, such as: APR, Total Cost, Monthly Payments, etc.