Better Option: Funding Your College Education With A Federal Student Loan Or Private Student Loan?
Choosing the best loan to fund your college fees and expenses is one of the many things you can be stuck on. Student loans can be acquired from government or private loans. But before all of these, let’s dive more into these types of loans to figure out which is suitable for you.
Difference between government and private student loan
Government Loans
The government provides funding for federal student loans which are now considerably simpler to obtain approval for than private loans. Interests and repayment terms are set by the government itself as well as the regulation of terms and agreements. One of the factors that affect these rates is your income status.
Considering that you’re applying for a student loan, however, lower interest will likely be applied as there is an exact rate established by the government. Other than this, you are guaranteed by the government for your loan and a lender is saved from the stress of not getting their money back. Lower interest rates can be obtained because they are willing to assume less risk.
Some of the federal loans that you can apply for are Direct Subsidized Loans and Unsubsidized Loans, Parent loans, and PLUS loans.
Private Loans
Non-federal loans, also called Private loans, are obtainable through banks, private or independent lenders, lending companies, and credit unions. In contrast to government loans, private student loans tend to have higher interest rates as lenders face higher risks for their money. Agreements are talked about by the applicant and the lender with the terms and conditions set by the latter, meaning the government does not have any input on this.
Factors to Consider When Choosing Between Federal and Non-Federal Student Loans
Fees and expenses for school such as books, stationery, dorm or apartment, and tuition can be covered by both federal and non-federal student loans. Like any other type of loan, the amount you owe should be paid back by the time that you agreed on it.
Find out what significant differences between these two loans below.
1. Checking of Credit Score
Before acquiring and granting a private loan, you will have to go through a credit check first may it be a loan for getting a vehicle, mortgage, or even a student loan. A lender will check your credit score which is characterized by a number of factors, including your payment and credit history, unsettled debts, performance toward bill payments, and many more. For some, this may be a long process, especially if the lender is strict in choosing their applicant. Aside from PLUS loans, federal loans don’t usually run a credit check on their applicants.
2. Difference in Interest Rates
It is very important to consider the different interest rates of loans so that you can obtain the one that will not empty your pocket before you could even pay for your expenses. The interest rates on federal loans are fixed and typically lower than those on private loans because the government imposes them. However, there are circumstances where private loans offer lower interest rates but this still depends on your credit score and the plan you choose. Perhaps this is the most significant difference for borrowers.
Non-federal lenders may provide fixed or adjustable rates that are higher or lower than those set by the government. A floating interest rate, or variable interest rate, changes over time along with the prime rate or the national average, while a fixed interest rate remains constant during the course of the loan. If the prime rate decreases, choosing a variable rate could benefit you by allowing you to pay a cheaper interest rate. But of course, no one can predict if the rate will increase or decrease because of unforeseeable factors.
Now, private lenders started lowering their annual percentage rates (APR) such that you can get below 3% for student loans while government loans have a 4.53% APR for student loans.
Naturally, the interest rates on both forms of loans are far lower than those on a credit card. Therefore, it is always recommended to not use your credit card to pay for your school expenses except if all other avenues have been explored.
3. Loan Repayment Period and Terms
There is a huge difference when it comes to the repayment terms of both loans. The repayment period for federal loans won’t become due until you graduate even if you drop out of college or repeat another semester. On the other hand, private loans are more strict. They may require you to start repaying the loan even while you’re still attending school. This is especially challenging for students who are trying to balance their budgets and part-time jobs.
Selected private creditors, however, are now providing deferred repayment periods as they are a huge burden on students’ budgets. Similar to federal loans, these enable you to postpone private student loan payments until after you graduate from college. The repayment choices offered by these private lenders often include full monthly payments, partial monthly payments, interest-only mortgages, and full deferment. The option that best fits their financial situation may be picked by the students.
4. What Tax and Subsidy Benefits Can You Get
Government loans significantly outweigh private loans in this particular area. One may be eligible for a subsidized loan if their financial status is very unstable. In this type of federal loan, you don’t have to worry about paying the interest rate on your borrowed amount as the government will be the one who will cover this. The duration of this loan only applies while you are in school, although they may also apply at other times depending on your financial situation.
Again, subsidized loans are only provided and covered by the government and are not available on private loans. The borrower is accountable for repaying the entire loan amount as well as any interest charges that accrued in accordance with their chosen repayment terms. Fortunately for others, lenders have developed financial programs that enable borrowers to put their loans on hold in case they experience health problems, sudden job loss, or other unfortunate situations.
Are You Qualified for a Student Loan?
One must be qualified first under the conditions set by the creditors before they can be approved and granted a loan. Federal loans are more lenient with regard to eligibility requirements in which you will only be presenting an identification stating that you are a US citizen, a valid Social Security Number (SSN), and you possess a high school diploma or GED. A specific GPA must also be maintained throughout your academic career.
When it comes to private creditors, they have different qualifications that you need to meet. Common requirements are
• Registered as a US citizen or permanently lives in the US
• Of legal age in their state
• Resides in one of the states the lender is permitted to lend in
• Have a minimum half-time enrollment.
• Enrolled in a school that qualifies or is covered by the creditor
• Enrolled in a degree program that qualifies or is covered by the creditor
Conclusion: Which Student Loan Suits You?
In conclusion, federal student loans are typically the first choice for anyone trying to pay for their education or to pay the debt from graduate, professional, or undergraduate school. Federal regulations oversee these loans, which typically have lower interest rates, don’t necessitate checking of credit scores, and come with extra benefits like tax deductions and potential forgiveness of interest.
You have also learned in this article that private creditors have taken the initiative to develop programs and alter some regulations, such as affordable interest rates and adjustable repayment periods, that make them more appealing than government loans. This is why it pays to do extensive research on your choices before selecting the best loan for you.
It is wise to follow the recommendations of private lenders who typically advise against taking out a private student loan before all federal options have been explored. But this doesn’t mean that you could just choose whatever private loan you first see. Take into consideration also other private lenders by comparing their terms, rates, and repayment duration to find the private loan that will ultimately serve your needs better.
