Federal and Private Student Loans. What's the Difference?

Here are some general characteristics of federal and private student loans.

Federal student loans:

• Have low fixed interest rates
• May include federally-subsidized interest depending on the student's need
• Provide flexible repayment and deferment options, including income-based repayment
• Require completion of the FAFSA
• Require school certification
• May offer borrower benefits, such as interest rate discounts
• PLUS loans require that the borrower have no adverse credit
• Stafford loans are not credit based

Private student loans:

• Can help when federal student loans, scholarships, grants and other aid aren't enough to fund your entire education
• Have interest rates and fees that are determined by the lender and often depend on your credit rating
• Usually have variable interest rates
• Although a cosigner is not necessary or required to apply, a qualified cosigner may help a student get approved for a private student loan and possibly get a better interest rate
• May or may not have deferment and forbearance options
• May offer borrower benefits, such as interest rate discounts
• May require school certification
• Require completion of a self-certification form

After you've checked for free funding available to you — if you decide you need additional assistance paying for your education — it's time to look to federal student loans. These are student loans with low fixed interest rates designed exclusively for those needing money to meet the costs associated with education.

Federal student loans are the largest source of student loans around. They have attractive terms when compared to most other borrowing options — such as low fixed interest rates and may include federally subsidized interest. Additionally they have many flexible repayment and deferment options. Federal student loans are now available solely from the Direct Loan Program. You will need to complete the Free Application for Federal Student Aid (FAFSA) before you can apply for federal student loans.

You should always exhaust your federal student loan options before applying for a private student loan. Private student loans are designed to supplement federal student loan programs when federal loans and other aid aren't enough to cover the entire cost of your education. Private student loans are available from schools, banks and education loan organizations. Private student loans are also known as alternative loans and the terms often vary considerably based on the lender and the borrower's credit history.

Remember: Any student loan has to be repaid — even if you don't finish school, are unhappy with the education you received, are unable to find a job or are making less money than you planned. So be conservative and borrow wisely because the amount of money you borrow now will have long-term effects that can influence your lifestyle!

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