Federal vs. Private Student Loans for College
Student loans are divided into two major categories—federal and private—and each category has smaller subcategories within it. But, while federal and private loans are different in many ways, all loans have one big thing in common: you’re responsible for paying back your loan (plus interest). This makes student loans less desirable than other forms of financial aid like grants and scholarships, but still a valuable option in paying for school.
How are Federal and Private Student Loans Different?
Private and federal student loans are different in several key ways, which will greatly impact your financial health, both now and in the future:
Source of funding
Federal loans are funded by the U.S. Department of Education, while private loans are funded by private institutions. This means that you will apply for a federal loan by filling out your FAFSA but apply for a private loan through the bank, school, state, or online lender of your choice.
Interest rates for private loans vary based on you or your co-signer’s credit score, whereas federal loans have a flat interest rate set by Congress. Generally speaking, if you or your co-signer has a good credit score, private student loan interest rates will be lower than federal interest rates. If your credit is not so great, then the rates would be higher with a private student loan. Federal student loans do not even consider credit score.
Federal loans offer flexible repayment terms such as income-based payment plans, where private loans usually do not. Federal loans usually offer a grace period, while with a private loan, you’ll typically need to start repayment right away.
Federal loan programs sometimes offer forgiveness after a number of years in certain public service career fields. Private student loan forgiveness options are very limited.
If you qualify for a Subsidized Direct Loan (based on financial need), the government will help pay the interest on your loan. Subsidies are not available with private loans.
Federal student loans have more eligibility requirements than private loans, and access to some federal loan programs is limited by financial need. Federal student loans are also limited in how much you can borrow each year and overall, while private loans have fewer limitations and allow you to borrow more.
When to Choose a Private Loan
When federal loans offer many benefits over private loans, it may seem unwise to take out private loans for college. But that isn’t always the case.
A private loan is a good choice if
- You’ve already filled out your FAFSA to see if you qualify for grants and other financial aid;
- You’ve applied for outside scholarships;
- You’ve borrowed the maximum amount in subsidized and unsubsidized federal loans or you don’t qualify;
- You have a cosigner with good credit or have a good credit score yourself and can benefit from the lower interest rates;
- You have a budget and know how much you need to borrow.
Applying for a Private Student Loan
Applying for private loans for college is a pretty quick process. Usually, there is an online portal you go through and the application process takes anywhere from 10-30 minutes. You also want to make sure you really need a private loan, and that you’re getting the best possible deal, before you sign on the dotted line.
Talk to Financial Aid About Private Student Loans
Most lenders will require you to get a form from your financial aid office certifying that you need additional aid to cover your cost of attendance (COA). This can also help you gain more confidence that you need to pursue private loan options, before moving forward.
For any type of private loan, the first step towards applying is speaking with your school’s financial aid office.
The Best Private Loans For College Students
Compare the Best Student Loan Refinance Rates
We compiled a list of the best private student loans available on the market for college students
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Student Debt Relief Loan Refinancing Advertiser Disclosure
College Ave: College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
College Ave Refi Education loans are not currently available to residents of Maine.
1 – The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation.
2 – $5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. Information advertised valid as of 04/26/2019. Variable interest rates may increase after consummation.
3 – This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.
What to Watch Out For
One of the downsides of private loans for college is that they’re usually offered by for-profit institutions, which are subject to fewer regulations than the U.S. Department of Education. Federal student loans are more predictable and uniform, whereas private loans can vary a great deal from bank to bank. Make sure you read the details of the master promissory note.
This means that when you’re shopping for private loans for college, it’s especially important to read the fine print. Make sure you’re aware of these details when you’re comparing loans.
Advertised vs. Real Rates
While the U.S. Department of Education is prohibited from advertising their loans, private lenders are permitted to do so, and they often create eye-catching ads to gain student borrowers’ attention.
Remember that lenders’ advertised interest rates usually apply only to the most qualified borrowers (those with the highest credit scores) and may not apply to you.
Look beyond the ads to find the real interest rate you would receive with your credit score (or your cosigner’s credit score) with several different lenders, and compare.
Variable vs. Fixed Rate
Even when you dig down past the advertisements to the interest rate you can really expect with your or your cosigner’s credit score, you need to look at one more detail: whether the interest rate is fixed or variable.
Many private student loans come with a variable interest rate, which means the rate can increase at any time, with little to no warning. What may look like the best interest rate out of the bunch may actually turn out to be the worst because of a variable interest rate. You can always take a variable rate for now if the savings are great enough, and refinance your student loans at a later date with a fixed rate if you feel like interest rates are on the climb. Just make sure there is no prepayment penalty on the private student loan so refinancing to lock-in doesn’t cost you any money.
Another detail to be aware of with private loans for college is borrower protections. With federal loans, these protections are regulated by the federal government. With private loans, you must act as your own advocate.
Read over what each lender offers in terms of deferment and forbearance, as well as repayment options. For example, you may or may not have the option to choose the length of your term, meaning you can choose to pay off the loan faster, with less interest, or take more time to pay the loan back while accruing interest.
Most private lenders consider your credit score when offering a loan. The higher your credit, the better your interest rate will be, and the more you may be able to borrow. But different lenders have different requirements when it comes to credit. If you need a co-signer, check to see if the lender has a co-signer release after a certain set period of on-time payments being made.
Undergraduate borrowers are less likely to have established credit or income, so lenders often allow students to apply for loans with a cosigner. Some lenders also at career path and income potential when a cosigner isn’t available.
Choose the Right Private Loans for College
Before considering any loan it’s important to understand exactly how student loans work. Once you are comfortable and you know what you are getting into, then it’s important to consider whether or not a private loan for college makes sense for you. We still think that despite the high cost of education, college is still worth it.