What’s the Difference Between Federal Student Loans and Private Student Loans?

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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.

Repayment terms

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.

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Here are our top student loan lenders of 2019!
LenderVariable APREligibility 
* 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 College Ave.

CollegeAve Disclosures

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 9/3/2019. Variable interest rates may increase after consummation.


2 Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.

3 Important Disclosures for Discover.

Discover Disclosures

  1. Students who get at least a 3.0 GPA (or equivalent) qualify for a one-time cash reward on each new Discover undergraduate and graduate student loan. Reward redemption period is limited. Please visit DiscoverStudentLoans.com/Reward for any applicable reward terms and conditions.
  2. View Auto Reward Debit Reward Terms and Conditions at DiscoverStudentLoans.com/AutoDebitReward.
  3. Aggregate loan limits apply.
  4. 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. The interest rate ranges represent the lowest interest rate offered on the Discover Undergraduate Loan and highest interest rates offered on Discover student loans, including Undergraduate, Graduate, Health Professions, Law and MBA Loans. The fixed interest rate is set at the time of application and does not change during the life of the loan. The variable interest rate is calculated based on the 3-Month LIBOR index plus the applicable Margin percentage. The margin is based on your credit evaluation at the time of application and does not change. For variable interest rate loans, the 3-Month LIBOR is 2.50% as of July 1, 2019. Discover Student Loans will adjust the rate quarterly on each January 1, April 1, July 1 and October 1 (the “interest rate change date”), based on the 3-Month LIBOR Index, published in the Money Rates section of the Wall Street Journal 15 days prior to the interest rate change date, rounded up to the nearest one-eighth of one percent (0.125% or 0.00125). This may cause the monthly payments to increase, the number of payments to increase or both. Please visit discover.com/student-loans/interest-rates for more information about interest rates.
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.

4 Important Disclosures for CommonBond.

CommonBond Disclosures

Offered terms are subject to change and state law restrictions. Loans are offered through CommonBond Lending, LLC (NMLS #1175900).

  1.  Rates are as of July 1, 2019 and include auto-pay discount. All loans are eligible for a 0.25% reduction in interest rate by agreeing to automatic payment withdrawals once in repayment. Variable rates may increase after consummation.

5 Important Disclosures for Citizens.

Citizens Disclosures

Undergraduate Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of October 1, 2019, the one-month LIBOR rate is 2.05%. Variable interest rates range from 3.15% – 11.41% (3.15% – 11.26% APR) and will fluctuate over the term of the loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a co-signer. Fixed interest rates range from 4.72% – 12.19% (4.72% – 12.04% APR) based on applicable terms, level of degree earned and presence of a co-signer. Lowest rates shown requires application with a co-signer, are for eligible applicants, require a 5-year repayment term, borrower making scheduled payments while in school and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change. Please note: Due to federal regulations, Citizens Bank is required to provide every potential borrower with disclosure information before they apply for a private student loan. The borrower will be presented with an Application Disclosure and an Approval Disclosure within the application process before they accept the terms and conditions of the loan.

Citizens Bank Student Loan Eligibility: Borrowers must be enrolled at least half-time in a degree-granting program at an eligible institution. Borrowers must be a U.S. citizen or permanent resident or an international borrower/eligible non-citizen with a creditworthy U.S. citizen or permanent resident co-signer. For borrowers who have not attained the age of majority in their state of residence, a co-signer is required. Citizens Bank reserves the right to modify eligibility criteria at anytime. Interest rate ranges subject to change. Citizens Bank private student loans are subject to credit qualification, completion of a loan application/consumer credit agreement, verification of application information, and if applicable, self-certification form, school certification of the loan amount, and student’s enrollment at a Citizens Bank- participating school. 

Please Note: International Students are not eligible for the multi-year approval feature.

3.70%
11.98%
1
Undergraduate, Graduate, and Parents

Visit College Ave

3.25% – 10.65%*,2Undergraduate and Graduate

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3.37%
11.87%
3
Undergraduate and Graduate

Visit Discover

3.52% – 9.50%4Undergraduate and Graduate

Visit CommonBond

3.15% – 11.41%5Undergraduate and Graduate

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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

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