What Are the Main Differences Between Federal and Private Student Loans?

Are you wondering what the differences are between federal and private student loans? You’re not alone. A recent survey by Citizens Bank reported that 44% of graduates don’t fully understand the difference between federal and private loans.

Most students apply for federal loans first, and then use private loans to bridge the gap.

Since you’ll likely be paying your student loan debt for many years following graduation, it’s important to choose the right kind of student loan. Here’s what you need to know.

Federal Student Loans

Pros

  • Flexible grace periods.
  • Federal loans include a fixed interest rate.
  • Following death, federal loans are discharged.
  • Loan forgiveness might be available after 10
  • There are various payment options
  • It’s possible to continue paying a federal loan post-default.
  • Interest does not accrue while you are in school.
Cons

  • The government can garnish your wages if you default.
  • Social Security checks might be withheld
  • You can’t get a federal loan discharged if you declare bankruptcy.
  • Loan limits. You might have to supplement with a private (or other) loan.
  • Federal loans are only available for schools that qualify.
  • These loans are not automatically renewed. You have to apply every year.
  • Higher interest rates for graduate students.

The government issues federal loans based on individual student needs. They come with significant advantages.

Flexible grace periods are a particularly valuable perk of federal student loans. Kristin Moon, an independent college counselor and founder of Moon Prep, says  “A little-known secret is that a grace period can be reset for federal loans. For Stafford Loans, if students return to at least a half-time status within six months, their grace period resets. It is as if it were never used. If the student drops below half-time status a second time, they again receive the full six month grace period. This does not apply to private loans.”

Private Loan

Private loans are not backed by the federal government. They do not offer grace periods and they are not as flexible when it comes to repayment. However, there are some benefits and disadvantages to private loans.

Pros

  • Interest rates are tax-deductible.
  • No prepayment penalties.
  • Future refinancing is possible.
  • Some private lenders reward students that have good grades and make automatic payments with loan discounts.
  • Private student loans are not limited and may cover total tuition costs.
  • Loan processing times are fast, which means you will get funds quicker.
  • Some private loans include a cosigner release clause; after a number of on-time payments are made, a cosigner may be released.
Cons

  • Missed payments result in instant default.
  • A credit check is required before a private loan can be obtained.
  • Most private loans require a cosigner.
  • Private loans tend to have variable interest rates that fluctuate.
  • Repayment plans are not as flexible as those offered through federal loans.
  • There’s little hope of deferment or forbearance with private loans.

While private loans do have some significant cons, these loans can bridge the gap between tuition rates and federal loan allowances.

Featured Student Loans

Lending PartnerAPR Range 
Fixed:
3.35% – 6.74% APR (with AutoPay)
Variable:
2.615% – 6.54% APR (with AutoPay)
Apply
Variable: as low as 2.52%*

Fixed:as low as 3.25%*

Apply
Variable: 2.56% – 6.73%*

Fixed: 3.37% – 6.99%*

Apply
Variable APR (Refinancing): 2.79% – 6.46%*
Fixed APR (Refinancing): 3.35% – 6.46%*
Apply
Variable APR: 2.81% – 10.24%*
Fixed APR: 4.45% – 11.76%*
Apply

Student loan planning: Getting your ducks in a row

Are student loans right for you? That depends. If you want to take on a full course load and need cash to support your studies, loans can be a viable option. However, you do have to educate yourself on the terms of each loan to find the option that best suits your specific needs.

It’s vital to compare rates and fees before making a choice. Take the time to create a spreadsheet that compares loan terms, interest, fees, and other payment details for every option you’re considering.

Student loan debt can be crippling, but it doesn’t have to be. Choose loans responsibly, borrow only what you need, and take the time to comparison shop. Used wisely, loans can bridge the gap between the profession you want and the education you need.

Featured Student Loans

Lending PartnerAPR Range 
Fixed:
3.35% – 6.74% APR (with AutoPay)
Variable:
2.615% – 6.54% APR (with AutoPay)
Apply
Variable: as low as 2.52%*

Fixed:as low as 3.25%*

Apply
Variable: 2.56% – 6.73%*

Fixed: 3.37% – 6.99%*

Apply
Variable APR (Refinancing): 2.79% – 6.46%*
Fixed APR (Refinancing): 3.35% – 6.46%*
Apply
Variable APR: 2.81% – 10.24%*
Fixed APR: 4.45% – 11.76%*
Apply