What’s the best way to borrow?
If you are planning to borrow money for college, you will have a lot of company. Almost 45 million Americans hold $ 1.71 trillion in student loans. Before taking on what could be decades of debt, it’s important to understand the many key differences between your two main choices: federal student loans and private student loans.
Read more: What to do if you can’t afford your student loans
Find out: How do generations compare when it comes to student loan debt?
Federal Student Loans vs. Private Student Loans – What’s the Difference?
Federal and private student loans must be repaid with interest whether or not you have graduated from college. The interest you pay on both types of loans may be tax deductible. Beyond that, the differences outweigh the similarities.
Related: College Student’s Guide to Smart Student Loan Borrowing
The main distinction is that the federal government funds federal student loans, and lenders like credit unions, banks, state agencies, and colleges fund private student loans themselves.
There are four types of federal student loans:
Subsidized direct loans: These loans offer better rates to undergraduates who can demonstrate the need.
Direct unsubsidized loans: Undergraduate and graduate students can apply without having to demonstrate the need.
Grad PLUS Loans: These are specifically intended for graduate and professional students.
Parent PLUS Loans: These are special loans given to the parents of a student.
Apply for Federal Loans First
One of the other key differences is that you must apply for federal student loans through the Free Application for Federal Student Assistance (FAFSA). The deadline for the 2020-2021 academic year to submit all FAFSA documents is June 30 at 11:59 p.m. Central Time. All updates and fixes are due by September 11th. For the 2021-2022 academic year, the deadlines are at 11:59 p.m. Time of June 30, 2022, and all updates and corrections are due by September 10, 2022. FAFSA determines your borrowing limit, which may not cover tuition fees, and FAFSA also determines your eligibility for other government assistance such as co-op and grants.
Find out: the moratorium on student loans expires soon – here’s what to do if you’re worried you won’t be able to pay
See: Is University Really Worth It? A look at the grim reality for student loan borrowers
With private loans, on the other hand, you apply directly through the lender and the lender determines your borrowing limit regardless of need. In most cases, a co-signer with good credit will help students get private loans. This is not the case with federal loans.
Generally speaking, you should only consider private loans after you have exhausted not only federal loans, but also grants, scholarships, and other rewards. This is partly because, unlike FAFSA time limits, you can apply for private loans as late as you want, as long as the lender has enough time to process the loan. More importantly, you need to align federal loans first as they tend to be more flexible, simpler, and more affordable than private student loans, which you should generally only use to fill funding gaps in the end.
Read: How To Refinance Your Student Loans
There’s a lot to like about federal student loans
With private loans, the lender sets the terms, which vary from loan to loan, lender to lender, and borrower to borrower. In contrast, with federal student loans, the terms and conditions are set by law and never change. Not only are federal loans generally cheaper – the current rate is 3.73% – but they offer a bunch of perks and perks that most private loans can’t match, including:
Fixed interest rates, as opposed to private loans, which can charge interest at a fixed or variable rate.
Income-based repayment plans, which adjust your monthly payment based on what you earn.
Deferred payments, which you should not start making until after you graduate. Private loans can be deferred, but in many cases you have to start paying while you are still in school.
Grant – If you can show that you need it, the government will pay your interest while you are in school. Private loans, on the other hand, are never subsidized.
With the exception of PLUS loans, there is no credit check with a federal student loan. In almost all cases, private lenders will check your credit and set your rate accordingly.
Several federal loans can be consolidated into one direct fixed rate consolidation loan. Private student loans cannot, although they can be refinanced.
With federal loans, students can change their repayment plans even after finalizing their loan.
Students working in the public service could see some of their federal loans canceled.
See: Two-thirds of older millennials still pay off student debt after 10 years
Parent loans fall somewhere in between
One of the two types of Direct PLUS loans, Parent PLUS loans have some of the benefits of federal student loans, but not all. For example, parents who borrow money through these federal loans can defer their payments until their child leaves school, just as if the student had taken out the loan.
Generational debt: it’s not who you think
Although the interest rate is fixed like a student loan, parent loans are never subsidized – the borrower is responsible for all interest. This interest, however, is usually still tax deductible and several loans can be combined into a direct consolidation loan. Just like students, parents who work in the public service may also have some of their loans canceled.
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Last updated: June 11, 2021
This article originally appeared on GOBankingRates.com: Comparing Private Student Loans and Federal Loans: What’s the Best Way to Borrow?