Federal and Private Student Loans [Complete Guide]

By: Yara Pollard

While many people have a strong level of familiarity with student loans, it is still a system that others don’t quite understand. Understanding everything that goes into student loans is crucial for borrowers and future borrowers. Many individuals experience the crippling effects of student loan debt in the long run because of making wrong decisions with student debt. 

By having a better understanding of student loans, people can better navigate their way out of student loan debt. There are a lot of strategies to crush student loan debt such as student loan consolidation and refinancing. 

But before all that, students first have to understand what federal and private student loans are. Otherwise, they can get into a lot of trouble for not being knowledgeable about the serious consequences when they fail to do their part. 

While both options allow students to avail of student loans, the two are far from being the same. Here’s everything you need to know about federal and private student loans:

Federal Student Loans

Federal student loans make up most of the total student loan debt. In fact, according to MeasureOne, 92% of the total student loan debt in America is federal student loans. That alone can give you an idea of just how different federal and private student loans are. 

Federal student loans make up most of the student loan debt for a couple of reasons. First, students are not required to have a credit history to be eligible to take federal student loans. 

Moreover, federal student loans also don’t require a co-signer. They are provided by the government and all enrolled undergraduate students can apply for federal student loans. This makes federal student loans more attractive than private student loans.

Federal student loans also have a fixed interest rate. This means that the interest rate you pay will be the same until you are through with paying up your federal student loan debt. Another good feature of federal student loans is that it can be subsidized for the government.

When subsidized, the government will be the one paying your federal student loans while you are still studying or you’re in deferment. Federal student loans are also more forgiving than private student loans. 

With it, you can apply for different payment plans such as income-driven payment plans. Here are different types of income-driven payment plans:

  1. Income-Based Repayment (IBR)
  2. Income-Contingent Repayment (ICR)
  3. Pay As You Earn (PAYE)
  4. Revised Pay As You Earn (REPAYE)

With federal student loans, your debt can be:

  • Forgiven
  • Discharged
  • Canceled

According to Federal Student Aid, “forgiveness, cancellation, or discharge of your loan means that you are no longer required to repay some or all of your loan.” This is important to remember as these particularities can help you out in a significant manner in times of a financial crisis. 

Private Student Loans

Private student loans are almost the opposite of federal student loans. They are more exclusive as private loans require a credit history. A lot of undergraduate students still have a short credit history or low credit scores.

Since private student loans are credit-based, they require a cosigner. This is why a lot of students opt for federal student loans. But before you get discouraged, know that private student loans have a lot of strong advantages.

It’s important that you get a credit card earlier on. The advantages of using credit cards extend to getting a good private student loan. Learn how to improve your credit score and also know more about the do’s and don’ts of using credit cards if you plan to get private student loans. 

Here are some of the benefits of having private student loans according to the U.S. News:

  • You can have lower interest rates – because private student loans are credit-based, you can pay lower interest rates if you have a good credit score. 
  • Fills up the financial gap – borrowers have a limit as to how much federal loans they can take. If federal loans are still not enough to pay for the cost of tuition, private student loans can fill this gap.
  • Higher borrowing limit

While private student loans do have great advantages, it also carries some disadvantages that can be a deal-breaker for some people. Here are but some of them:

  • The interest of private student loans is often variable. This means that interest rates can increase or decrease throughout their lifetime.
  • Private student loans are less forgiving and there are less flexible repayment plans. 
  • Forbearance and deferment may not be an option if a borrower should have difficulties with paying. 

When you get to know all of these, it’s not hard to see why federal student loans make up most of the student loan debt in America. You also get to see just how different federal and private student loans are. 

We hope that you were able to know more about federal and private student loans through this article. With whatever you do, be responsible and diligent in dealing with your student loan debt. 

As Melissa from SunBurnt Saver said, “ student loan debt doesn’t have to ruin your wild and precious life.” Crush your student loan debt by knowing more about federal and private student loans. 

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