Federal vs. Private Loans

AJ Anzola

When you’re looking to go to college, affordability is everything! And just as scholarships and grants are great sources of money to help you go to the college of your choice, another option to consider is student loans. These loans are broken up into two main groups: federal and private student loans. However, whether the money is borrowed from a federal or private lender, they both work the same way. This means that you take the loan out at an amount that the university decides based on your financial need and pay it back later, along with any accumulated interest. You can use these loans for tuition, room and board, books, or other fees. 

Federal Loans

According to studentaid.gov, “To apply for a federal student loan, you must first complete and submit a Free Application for Federal Student Aid (FAFSA®) form. Based on the results of your FAFSA form, your college or career school will send you a financial aid offer, which may include federal student loans.” In terms of federal loans, the three main types that prospective college students look into are Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans for Parents. One can qualify for Direct Subsidized Loans by demonstrating financial need, and the Department of Education pays the interest at certain times. Direct Unsubsidized Loans are available to students without demonstration of financial need. Lastly, Direct PLUS Loans for parents are loans taken out to benefit the student that the parents are fully responsible for paying off. However, there will be a credit check on the parents to determine eligibility. We will cover more about the different types of loans in an upcoming blog post! 

Private Loans

Private loans are usually provided by banks, credit unions, or online lenders. Thus, they have advantages, such as building credit through repayment and a higher borrowing ceiling that can cover more of the cost of attendance. They also typically require payments while in school without deferments, require an established credit or cosigner to inherit unpaid debt, and can be tax-deductible in terms of interest. Some negatives regarding these kinds of loans include that interest rates can be variable, as opposed to the fixed rate found in many federal loans. A variable interest rate changes with the economy meaning that if all interest rates increase, so will the rate on your loan. Additional cons include no federal subsidies, meaning interest rates must be paid by the loaner. The biggest determining factor for certain aspects of a private student loan, however, is speaking with the lender about specifics and understanding all details of the loan. 

Which to Choose

In conclusion, federal student loans and private student loans can be similar, yet very different. It is highly recommended that a prospective college student seeks out Federal Student Loans first via the FAFSA before looking for private loans. That way, you have the benefits of the federal loans for a designated amount and can borrow the rest from a private lender. This means you are taking less risk in an unsubsidized, variable rate loan. With college becoming more and more expensive, finding a feasible way to pay for it seems more daunting by the day. But with student loans, either federal or private, you can achieve your goal of getting a college degree.