Navigating the complex realm of student loans can be confusing and a bit overwhelming for some families. Although many students will complete the Free Application for Federal Student Aid (FAFSA) in January, and may receive financial aid packages that include both federal and private loans, not all students will understand the difference between the programs. Unfortunately, many students will simply accept their loan packages without reviewing any of the program details or repayment terms. Before any student accepts a student loan offer, federal or private, he/she should review the general differences between the programs first. Here is a brief overview of how federal student loans differ from private loans.

Federal Student Loans

The most common federal student loans for undergraduate students are Direct Subsidized and Direct Unsubsidized loans and the Parent PLUS loan. The loan amount offered is based on the student’s enrollment status (full-time or part-time), how long the student has been in college (first-year, second-year, etc.), and whether the student is independent or dependent. Those with serious financial need will also be considered for the Perkins Loan program. The following are generally true for all federal loans:

• No credit check needed (except for Parent PLUS)
• Repayment starts after the student graduates, leaves school, or drops below part-time status
• The interest rate is fixed (3.4 to 7.9)
• In most cases, a cosigner is not required
• Interest may be tax deductible
• Students have several repayment options, including deferment
• Loans can be consolidated into a Direct Consolidation Loan
• No prepayment penalty
• Loans may be forgiven through certain programs

Private Loans

Students should make every effort to apply to scholarships and accept federal student loans before considering a private student loan. Private loans typically carry higher interest rates and may also have the following stipulations:

• Will likely require a credit check
• Will likely require a cosigner
• May have a variable interest rate
• May require repayment while the student is still in school
• Interest may not be tax deductible
• May not offer forbearance or deferment options
• May impose prepayment penalties
• Cannot be consolidated into a Direct Consolidation Loan
• May not offer loan forgiveness options

Recently, the Obama Administration approved the Pay as You Earn Repayment Plan, which is not available to those who take out private student loans. This plan allows students, who are new borrowers as of Oct. 1, 2007, and have received a disbursement of a federal Direct Loan on or after Oct. 1, 2011, to make payments based on their family income and size. After 20 years, any remaining balance will be forgiven.

Regardless of which type of loan students decide to accept, they should make every effort to consider other options for reducing college-related expenses. One of the best ways to help reduce college costs is through scholarships. Students can use a free service, such as ScholarshipExperts.com, to help them find scholarships that are perfect for their needs, and should always check with their guidance counselor for possible local opportunities, as well.

Tags: Federal Student Loans, Private Student Loans, Student Loan Help
Posted in Paying for College | 2 Comments »

2 Responses to “Understanding the Differences Between Student Loans”

1. Sani says:

   December 29, 2012 at 8:39 am

   Tamara, great article. I feel like we constantly need to revisit this for students/parents because there’s so much confusion and uncertainty. Thanks for sharing!
   -Sani @CollegeFocus
2. Tamara Krause says:

   December 30, 2012 at 8:48 am

   My pleasure. Thank you for following our blog.