September 01, 2017

Private vs. Federal Student Loans: Which Is Better?

According to College Board, the average cost of a full-time student attending college during the 2016-2017 year was $33,480 at private colleges, $24,930 for out-of-state residents at public colleges, and $9,560 for in-state residents at public schools.

Now, while these costs do vary based on where you’re attending, the amount of money you’ll need for school-related necessities is certainly overwhelming – and roughly 3% higher than last year alone.

For many, coming up with the money for school is a tremendous challenge. Unless you’ve squirreled away the money yourself, earned a scholarship or grant, or had someone provide for your college education, your options usually boil down to obtaining a student loan.

As student loans go, there are really only two types to consider: federal student loans and private student loans. If you’re unsure which one is the right student loan for you, here we take a look at the differences between the two, and let you decide which one is better for your situation.

Student Loan Basics

To start, Federal student loans are loans that are issued and guaranteed by the U.S. Department of Education, while private student loans can originate from a variety of sources, including banks, credit unions, state agencies, or the school you’ll be attending.

Unlike discretionary loans, where you can use the loan for any purpose, federal student loans and private student loans are designed solely for getting your post-secondary education. This typically includes such things as tuition, books, study materials, and possibly housing, depending on the agreement you sign.

Yet, beyond each of these student loans requiring you to pay back your loan with interest at some point after its origination, there are plenty of benefits that go with choosing either one.

Advantages of Federal Student Loans

When you take out a federal student loan, you’re making a long-term contract with a federal agency to pay back your student loans during an agreed time period. However, one of the greatest benefits of having a federal student loan is that you won’t have to begin repaying the loans until you’ve graduated, left school, or start attending school less than half-time. And the advantages don’t stop there.

In addition to having more time to repay your federal student loans, you’ll also gain access to some fairly generous borrower protections that offer even more options once you start the repayment process. Here is a list of the most sought-after benefits of federal student loans:

  • The government pays your interest on subsidized loans while you’re attending school full-time
  • Most federal student loans don’t require a credit check prior to approval
  • Your loan won’t require a co-signer during the application process in most cases
  • You have more options for student loan repayment, student loan consolidation and even student loan forgiveness with federal loans
  • You may be able to postpone payments, or lower your payments, if you’re having difficulty with repaying your loan
  • You won’t be penalized for making student loan prepayments

An added bonus of federal student loans is a fixed interest rate, which is often lower than most credit card interest rates, and may even be lower than private loan interest. Not to mention the fact that you may be able to claim the interest you paid on your federal student loans on your next year’s taxes.

Advantages of Private Student Loans

If you’re on the search for the best student loan options, a private loan may be just what you’re looking for, as they sometimes offer their own benefits that are unavailable through federal student loans. First, unlike most federal student loans, private loans aren’t limited by federal restrictions on loan size, meaning your private student loan could cover the total Cost of Attendance (COA) of your time at college. Some federal loans, on the other hand, are capped at a certain amount – both annually and overall.

Next, while interest rates vary on private student loans depending on your income, co-signer availability, and your credit score and history, you could earn special discounts on interest for having good grades or setting up automatic payments.

In addition to the above, private student loans sometimes offer other benefits that may be of interest to you as a borrower. These include:

  • A shorter application, approval and disbursement process that makes your funds accessible in a shorter period of time
  • Your co-signer(s) often won’t be required to serve as the primary borrower on private student loans, so it won’t impact their credit as substantially
  • Your co-signer(s) can obtain a release from your private student loans once a certain amount of on-time payments and other requirements are met
  • You may be able to choose a variable rate on your loan, which could lower the amount you’re paying each month, or reduce the overall amount you pay during the loan’s lifecycle
  • Private loans can cover any gaps left by other financial aid packages and personal expenses

Of course, your situation will ultimately determine which of these two is the better option, but it’s important to know what each student loan type offers, and how it can benefit you specifically.

Whether you obtain your student loans from the Department of Education or a private lender, you should know that college graduates earn over 50% more in yearly income than high school graduates. So, while it may seem like taking out student loans is a difficult choice to make, you’re really just investing in your long-term future.

Speak to one of our student loan specialists at (800) 771-6358 or fill out our free online form to figure out how to make your monthly payments more affordable and to stay on track with your personal repayment plan.