Federal and private student loans may seem like two sides of the same debt coin. After all, whether you get your loans from a private lender or the federal government, you’re on the hook no matter what.
Well, it’s not that simple.
Deciding between a federal student loan or private student loan is not as easy as comparing apples to apples. It’s important for college students, graduates, and parents to understand exactly what makes a federal student loan a different animal from a private student loan. Their financial health might depend on knowing the differences.
Federal student loan definition
Federal student loans are issued and guaranteed by the Department of Education. Because the loans are issued by the government, interest rates for federal student loans are the same for every borrower, rather than being dependent upon the borrower’s credit rating or other financial factors.
You can apply for a federal loan by submitting a Free Application for Federal Student Aid (FAFSA) form. The Department of Education uses this to determine your expected family contribution toward your education.
Private student loan definition
A private student loan is any student loan that is not issued by the federal government. Unlike federal student loans, private loans are funded by banks, credit unions, and other types of lenders.
That also means that the interest rates for these loans are set by the lenders, based on the borrower’s credit history and/or other underwriting criteria determined by the lender.
Federal vs. private student loans
It’s important that you consider the following issues when deciding between federal and private student loans, or when considering whether to refinance your federal loans:
Student loan interest rates
In general, student loan interest is fixed on federal loans, which means the rate remains the same throughout the repayment period. Interest rates on federal student loans are currently tied to the 10-year Treasury Note, with an additional set percentage added on.
Private student loans, on the other hand, can offer fixed or variable rates. In the case of a variable-interest loan, your rate can fluctuate, changing your monthly repayment amount and increasing the amount you pay in interest over the life of the loan.
After borrowers have graduated and established a good work and credit history, they may find that private lenders are more interested in helping them to refinance their federal loans to a lower interest rate.
Again, refinancing from a fixed to variable loan could end up resulting in higher payments in the future. But depending on how high your credit score and income level is, you might find you can save money over your loan term by refinancing.
Private lenders do not offer the same kind of repayment options available with federal loans. In particular, borrowing from Uncle Sam means you are eligible for the following:
- You are not required to start repayment until after you have graduated. And if you have any subsidized federal student loans, you do not accrue interest while you are still in school or during the grace period after graduation.
- Federal student loans can be put on forbearance or deferment if you have an economic need for it. Some private lenders offer their own deferment/forbearance options, but they aren’t standard.
- You can limit the amount of your monthly payment based upon your income with a federal loan, as well as qualify for loan cancellation after 20-25 years.
- Borrowers who are pursuing careers in public service may be able to have their federal loans forgiven after 10 years.
- Federal loans are discharged upon the borrower’s death (or permanent disability, in some cases). There is no such discharge of private loans, and since many private loans require a co-signer, your co-signer will become responsible for your student debt after your death.
Consequences of default
Defaulting on your student loans is never a good idea, whether your loan originated federally or privately. However, borrowers do have a few more protections in place in case of default on a federal student loan:
- A private student loan is considered to be in default after 120 days of non-payment. Federal borrowers are not considered to be in default until 270 days of non-payment.
- A private lender will begin to seek payment from any co-signers on the loan when payment is simply late. They do not have to wait until the primary borrower is in default. Since federal student loans are not co-signed, borrowers do not have to worry about their student loan hurting their relationships.
- The lender may add collection charges to the amount the borrower owes, which can increase the loan balance by 25 to 40 percent.
- While the federal government can garnish your wages without getting a court order, the amount they can take is limited to 15 percent of your disposable income. Private lenders need to get a court judgment against the borrower in order to garnish wages, but depending on the state, they may take as much as 25 percent of the borrower’s income.
Choosing between federal student loans and private loans
In general, it’s a good idea to take out federal student loans in the first place and to keep them and their benefits post-graduation. However, if you have high interest rates and could benefit most from refinancing and saving money, a private loan might make more financial sense.
Need a student loan?Here are our top student loan lenders of 2019!
|* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers.
1 Important Disclosures for Earnest.
2 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
3 Important Disclosures for College Ave.
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
(1)All rates shown include the auto-pay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.
(2)This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with a 10-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 8.35% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $179.18 while in the repayment period, for a total amount of payments of $21,501.54. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
(3)As certified by your school and less any other financial aid you might receive. Minimum $1,000.
Information advertised valid as of 7/1/2019. Variable interest rates may increase after consummation.
4 Important Disclosures for Suntrust.
Before applying for a private student loan, SunTrust recommends comparing all financial aid alternatives including grants, scholarships, and both federal and private student loans. To view and compare the available features of SunTrust private student loans, visit https://www.suntrust.com/loans/student-loans/private.
Certain restrictions and limitations may apply. SunTrust Bank reserves the right to change or discontinue this loan program without notice. Availability of all loan programs is subject to approval under the SunTrust credit policy and other criteria and may not be available in certain jurisdictions.
©2019 SunTrust Banks, Inc. SUNTRUST, the SunTrust logo and Custom Choice Loan are trademarks of SunTrust Banks, Inc. All rights reserved.
* Offer valid for new Custom Choice Loans for which applications are submitted for a credit decision between 12:00:00am EST on June 1, 2019 and 11:59:59pm EST on August 31, 2019. A 0.50% interest rate reduction will be included in the loan options presented to an applicant during the online application process, upon passing the initial credit review. The interest rate reduction will be applied as of the first disbursement date and will be effective for the life of the loan.
5 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restrictions. Loans are offered through CommonBond Lending, LLC (NMLS #1175900).
6 Important Disclosures for Citizens.
7 Important Disclosures for PNC.
Fixed Annual Percentage Rates (APRs): APRs range from 4.52% to 9.58% for a 5-year term. APRs range from 5.05% to 10.26% for a 10-year term. APRs range from 5.55% to 10.84% for a 15-year term. Fixed rates are based on the creditworthiness of the borrower and co-signer, if any. Loan Payment Example: The monthly payment per $10,000 borrowed at a fixed rate range of 5.05% APR to 10.26% APR for 10 years means you would make 120 payments which may range from $131.94 to $207.24. For the fixed rate loan, the monthly payment will remain fixed for the term of the loan. Payments may vary for other repayment term options.
Variable Annual Percentage Rates (APRs): APRs range from 4.90% to 9.92% for a 5-year term. APRs range from 5.38% to 10.57% for a 10-year term. APRs range from 5.85% to 11.11% for a 15-year term. Variable rates are based on the London Interbank Offered Rate (LIBOR) index plus a margin depending on the creditworthiness of the borrower and co-signer, if any. The LIBOR index, adjusted quarterly, is equal to the average of the one-month LIBOR rates as published in the “Money Rates” section of the Wall Street Journal on the first business day of each of the three (3) calendar months immediately preceding each quarterly adjustment date. The LIBOR index is currently 2.47%. If the index increases or decreases, your rate will increase or decrease accordingly. Loan Payment Example: The monthly payment per $10,000 borrowed at a variable rate range of 5.38% APR to 10.57% APR for 10 years means you would make 120 payments which may range from $135.93 to $212.65. For the variable rate loan, the monthly payment may increase or decrease if the interest rate increases or decreases. Payments may vary for other repayment term options.
APRs and loan payment examples are for the fully deferred repayment option for the Undergraduate & Graduate loan programs and include the 0.50% interest rate discount for automatic payments. The lowest APR is available to well qualified applicants. Your actual APR will be based on your credit qualifications, selection of fixed or variable rate option, loan program, repayment term, repayment option and whether you elect the automatic payment feature. Loan payment examples assume 30 days to first payment after the deferment period (45 months in school and 6 month grace period). Payments vary for other rates, repayment terms and repayment options.
In addition to Undergraduate and Graduate loans, PNC offers loans for Health & Medical Professions, Health Professions Residency and Bar Study. Rates may vary by loan program and are subject to change at any time. Visit pnconcampus.com for current rates, additional loan payment examples and more details about the Solution loan products.
Please note: PNC reserves the right to modify or discontinue the terms of these program at any time without notice. You are encouraged to explore all scholarship, grant and federal borrowing options before applying for a private loan. Private loans are subject to credit approval.
PNC is a registered service mark of The PNC Financial Services Group, Inc.
7 Important Disclosures for Discover.
Discover's lowest rates shown are for the undergraduate loan and include an interest-only repayment discount and a 0.25% interest rate reduction while enrolled in automatic payments.
|3.35% – 11.44%1||Undergraduate and Graduate|
|3.37% – 10.75%*,2||Undergraduate and Graduate|
|3.96% – 11.98%3||Undergraduate, Graduate, and Parents|
|3.14% – 10.68%4||Undergraduate and Graduate|
|3.52% – 9.50%5||Undergraduate and Graduate|
|3.36% – 11.62%6||Undergraduate and Graduate|
|4.90% – 11.11%7||Undergraduate and Graduate|
|3.37% – 11.87%8||Undergraduate and Graduate|