You’ve spent endless nights researching degree programs and submitting applications to your preferred college or graduate program and you finally receive your acceptance letter. Woohoo, you’re in—small win!  Now, it’s time to turn your attention to tuition.   Aside from grants and scholarships, student loans are still a viable option to pay your way through school. We’ve saved you some time and outlined five key differences between federal and private loans.  Be smart about your loan options and save time, money and stress: 1. Federal Lenders vs. Private Lenders—Federal student loans are funded by the federal government and come in three flavors:

  • Stafford Loans—are available through the Federal Family Education Loan (FFEL) Program and the Direct Loan Program.  Stafford loans for undergrads can be subsidized or unsubsidized—more on that in a bit— and graduate students are only eligible for unsubsidized loans.  The amount you can borrow depends on three factors:
    • Whether or not your parent has claimed you as a dependent
    • Whether or not you demonstrate financial need
    • What year you are in college
  • Perkins Loans—is reserved for students with the lowest family contribution.  Although this is a federal loan, Perkins Loans are given out at the discretion of your school; the amount you receive and the amount of each loan are based on the available funds from individual colleges.  If you are an undergraduate student, you may be eligible to receive up to $5,500 a year. As an undergraduate, the max total amount you’re eligible to borrow is $27,500.
  • Parent Loans for Undergraduate Students (PLUS)—are provided to the parents of dependent students to help pay for educational expenses while attending college.  The maximum PLUS loan amount a parent can borrow is determined by the school. Private loans are provided by banks, credit unions, state agencies or your school.

2. Federal Loan Interest Rates Are Generally Lower—Federal loan interest rates are generally lower and will hover around 4.29% while Perkins Loans have a fixed interest rate of 5%.  Interest is calculated as a percentage of the unpaid principal amount.

  • Private student loans, on the other hand, have variable interest rates and can substantially change from month to month; they are not subject to the law and can go as high as 17%! Additionally, some private loans will compound interest, in that your interest may be added to your principal amount just before your repayment, so you end up paying more towards your loans in the long run.

3. Federal Loans, Generous Grace Period  |  Private Loans, Pay Me Now!—For most federal loans, you may not have to start repaying them until you graduate, leave school, or attend school less than part-time.  Additionally, some loans allow a 6-month grace period after you graduate. (The feds are your friends… in this case.)  With private loans, many institutions require you to make payments right away— no grace period. As with everything, do your research before you commit! 4. Free Money: Subsidized vs. Unsubsidized—Students that demonstrate financial need will qualify for subsidized loans.  The government will pay the interest on your loans while you are enrolled in school at least part-time.  Private loans are unsubsidized and you are responsible for paying the interest yourself. 5. Application Process and Qualifications—To apply for federal student loans for college, you can complete the Free Application for Federal Student Aid (FAFSA). Submitting a FAFSA is free and gives you access to the largest source of financial aid. To apply for private student loans, find an institution (or consult your financial aid department for preferred lenders). Be sure to have someone in mind that could potentially come on as your co-signer.  Additionally, private loans may require an established credit record. The total cost of your private student loan, including interest, will depend on your credit score and other factors. In short, exhaust all federal student loan options before approaching private loan lenders. Good luck on pursuing your passion and achieving your vision!

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