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Private Loans vs. Government Loans: Which Student Loans Are Right for Me?

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Attend school with the right loans
Sarah Badani
Sarah Badani
Jul. 06, 20213 min read
If you are considering (or enrolled in) college, you’ve no doubt wondered if one loan type is better than the other at keeping your debt down. To make the right choice for your needs, understand the difference between federal and private student loans, which is better for various situations, and if one of the options will help you.

What are Private and Government Student Loans?

Government or federal student loans are funded by the federal government. This makes them much easier to get approved for. Plus, the government regulates the terms and conditions of these loans, including the amount of interest being charged and setting the repayment terms (usually according to your income status).

You can usually get lower interest rates on these student loans as well, because the government has fixed the rate of interest that is allowed to be charged. What’s more, a lender is less concerned that they won’t get their money. That’s because the government is acting as guarantor on your student loan. Since they’re taking a smaller risk, they can afford to provide lower interest rates.

Paying  for college tip: Private student loans can cover cost of attendance & living expenses. 

Check out top private student loan options >>

There are several different types of government loans that someone can qualify for:

  • Parent loans

  • PLUS loans

  • Direct subsidized loans

  • Direct unsubsidized loans

Private student loans are non-federal loans that are given out by independent lenders, credit unions, agencies, or banks. Private loans come with a greater risk to the lender, and therefore these loans will usually have higher interest rates associated with them. The terms and conditions are set solely by the lender, and the government has no say in the matter.

"The first point of advice there is that you’re going to need to get a co-signer for it to get approved, so it’s really almost not worth it at all for a student on their own unless they have their own income, which is usually not the case. So, find a cosigner and then consider your options."

-Kevin Walker - CEO and Founder at Collegefinance.com

The Important Differences

Both government and private student loans can be used to pay for schooling expenses like tuition, books and supplies, room and board, and many other living expenses that come up during school. Both require you to borrow and pay back the money over a certain amount of time. However, there are a few primary differences that set these 2 funding options apart from another.

1) Credit Checks

Whenever you apply for a private loan, whether it’s a student loan, a mortgage, an auto loan, etc. the lender will run a credit check on you. This is an assessment of your past and current credit health based on your credit history, any outstanding debt you currently have, how well you pay off your bills, and more. For general federal student loans, there is no credit check, though you'll have a credit check to determine your eligibility for PLUS loans.

2) Interest Rates

Probably the most important difference for borrowers is the gap in interest rates between private and federal student loans. Because the government governs the interest rates for these loans, the rate is fixed and generally lower than you’ll get from a private loan. Private lenders can offer either fixed or variable rates, and depending on which one you get, and your credit history, they can be higher or lower than the government rates.

A fixed interest rate is one that stays the same throughout the entire life of the loan, whereas a variable rate fluctuates with the national average. Choosing a variable rate may give you an advantage of paying a lower interest rate if the national average drops.

It’s worth noting, private lenders have taken note and started lowering their APRs as well. For example, the current interest rate for a government direct loan is 4.53% for undergradute loans, while private loans can go below 3%.

Of course, both types of loans are substantially lower than you would get from a credit card. So, never opt to use credit cards for your school expenses unless you’ve exhausted all other options.

3) Repayment Terms

Another important difference between these 2 types of loans is when you have to start paying back the loan. Government loans aren’t due at all until after you finish school (graduate) unless you leave school or change your enrollment status to being a less than half-time student. Private student loans, on the other hand, aren’t as black and white. Some lenders will require you to start paying off the loan even while you’re in school, which can be incredibly difficult for students who are living on a budget and not working full time.

"Contact your loan servicer about your private student loans and ask about what kind of repayment special provisions might be available, whether that’s deferment, forbearance, or a different repayment stream. 

The answer may be “no”, but it doesn’t hurt to ask. Those are the things that I do recommend to people who are struggling with their student loan repayment."

-Kevin Walker - CEO and Founder at Collegefinance.com

Because of this strain on student finances, many private lenders have started offering deferment repayment terms. These allow you to push off the payments on your private student loan until after you finish school (like a government loan). These private lenders will usually have multiple repayment options including total deferment, interest-only payments, partial monthly payments, and full monthly payments. Students will choose the option that works best with their finances.

4) Subsidies and Tax Benefits

This is one area that government loans far outshine private loans. If you are in a difficult financial position, you may qualify for a specific type of government loan called a subsidized loan in which the government actually pays off the interest accrued for the amount you take out. Usually, these terms will only last for the duration of your schooling, but there are other times of financial hardship when these terms can apply as well. Note, this only applies to government student loans.

Private loans are not subsidized, and the borrower is responsible for paying off the full amount of the loan, plus the interest accrued according to their repayment plan. However, many competitive lenders have introduced certain financial hardship programs that will allow a borrower to freeze their loan in the event of loss of employment, medical issues, or other extenuating circumstances.

Check out top private student loan options >>

Eligibility Requirements

Eligibility requirements are the criteria a lender asks for from a borrower in order to get a loan. Federal loans are more flexible with their qualifications; as long as you have a valid Social Security number, are a US citizen, and have a high school diploma or GED. You’ll also need to maintain a certain GPA throughout your schooling.

Every private lender can set their own qualifications, but these are generally what lenders are looking for from a borrower:

  • US citizen or permanent resident

  • Of legal age within their state of residence

  • Live within one of the states where the lender is authorized to lend

  • Be enrolled for at least of half-time

  • Be enrolled in an eligible institutions

  • Be enrolled in an eligible degree program

When is Each Loan Type the Best Option for You

To sum it all up, federal student loans are generally always the preferred first option for someone looking to fund their schooling or pay off college, career, or graduate school. These loans are regulated by the federal government, usually come with lower interest rates, require no credit checks, and have additional benefits like tax deductions and possible interest forgiveness.

But as you may have figured out by reading through this article, things are far from black and white. In fact, forward-thinking private lenders are starting to implement several policies that are making them more attractive to borrowers than the government option. Things like lower interest rates and flexible repayment plans are contributing to the switch. For this reason, it pays to research your options thoroughly before deciding on the best lender for you.

Private lenders will usually tell you to exhaust all federal options before you take out a private student loan, and this is sound advice. However don’t rule out private loans until you’ve compared the rates, terms, and conditions, because you might end up with a private loan that works better for you at the end of the day.

Check out top private student loan options >>

Sarah Badani
Written bySarah Badani

Sarah Badani has extensive research and review experience in the finance industry. With a degree in psychology and education, she brings a level of depth and understanding to her writing along with her own flavor to spice up each topic in a unique and inviting way. She writes for BestMoney and enjoys helping readers make sense of the options on the market.‎

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