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 2020!
|* 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 Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
2 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.
1Rates shown are for the College Ave Undergraduate Loan product and include autopay 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.
2This 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. This informational repayment example uses typical loan terms for a first year graduate student 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 7.10% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $141.66 while in the repayment period, for a total amount of payments of $16,699.21. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
Information advertised valid as of 5/18/2020. Variable interest rates may increase after consummation. Lowest advertised rates require selection of full principal and interest payments with the shortest available loan term.
3 Important Disclosures for Ascent.
Before taking out private student loans, you should explore and compare all financial aid alternatives, including grants, scholarships, and federal student loans and consider your future monthly payments and income. Applying with a cosigner may improve your chance of getting approved and could help you qualify for a lower interest rate. Ascent Student Loans may be funded by Richland State Bank (RSB). Ascent Student Loan products are subject to credit qualification, completion of a loan application, verification of application information and certification of loan amount by a participating school. Loan products may not be available in certain jurisdictions, and certain restrictions, limitations; and terms and conditions may apply. Ascent is a federally registered trademark of Turnstile Capital Management (TCM) and may be used by RSB under limited license. Richland State Bank is a federally registered service mark of Richland State Bank.
* Application times vary depending on the applicant’s ability to supply the necessary information for submission.
4 Important Disclosures for Discover.
Lowest APRs shown for Discover Student Loans are available for the most creditworthy applicants for undergraduate loans, and include an interest-only repayment discount and a 0.25% interest rate reduction while enrolled in automatic payments.
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.
Undergraduate Rate Disclosure: Variable interest rates range from 3.54%- 6.40% (3.54% – 6.40% APR). Fixed interest rates range from 3.79% – 6.65% (3.79% – 6.65% APR).
Graduate Rate Disclosure: Variable interest rates range from 2.72% – 6.11% (2.72% – 6.11% APR). Fixed interest rates range from 3.49% – 6.36% (3.49%-6.36% APR).
Business/Law Rate Disclosure: Variable interest rates range from 1.47% – 8.35% (1.47% – 8.20% APR). Fixed interest rates range from 4.45% – 10.74% (4.45% – 10.59% APR).
Medical/Dental Rate Disclosure: Variable interest rates range from 1.47% – 7.25% (1.47% – 7.10% APR). Fixed interest rates range from 4.40% – 9.64% (4.40% – 9.49% APR).
Parent Loan Rate Disclosure: Variable interest rates range from 3.09%-6.23% (3.09%-6.23% APR). Fixed interest rates range from 5.48%-8.52% (5.48%-8.52% APR).
Bar Study Rate Disclosure: Variable interest rates range from 4.79% – 9.93% (4.79% – 9.85% APR). Fixed interest rates range from 7.39% – 12.94% (7.39% – 12.82% APR).
Medical Residency Rate Disclosure: Variable interest rates range from 3.88% – 7.38% (3.88% – 7.04% APR). Fixed interest rates range from 6.99% – 10.49% (6.97% – 10.08% APR).
Variable Rate Disclosure: Variable Rates are 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 May 1, 2020, the one-month LIBOR rate is 0.44%. Variable interest rates will fluctuate over the term of the loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree and presence of a co-signer. The maximum variable rate is the greater of 21.00% or Prime Rate plus 9.00%.
Fixed Rate Disclosure: Fixed rate ranges are based on applicable terms, level of degree, and presence of a co-signer.
Lowest Rate Disclosure: Lowest rates require a 5-year repayment term, immediate repayment, a graduate degree (where applicable), 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. Rates are subject to additional terms and conditions, and are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
Federal Loan vs. Private Loan Benefits: Some federal student loans include unique benefits that the borrower may not receive with a private student loan, some of which we do not offer. Borrowers should carefully review federal benefits, especially if they work in public service, are in the military, are considering possible loan forgiveness options, are currently on or considering income based repayment options or are concerned about a steady source of future income and would want to lower their payments at some time in the future. When the borrower refinances, they waive any current and potential future benefits of their federal loans. For more information about federal student loan benefits and federal loan consolidation, visit http://studentaid.ed.gov/. We also have several resources available to help the borrower make a decision on our website including Should I Refinance My Student Loans? and our FAQs. Should I Refinance My Student Loans? includes a comparison of federal and private student loan benefits that we encourage the borrower to review.
Eligibility Criteria: Applicants must be a U.S. citizen, permanent resident, or eligible non-citizen with a creditworthy U.S. citizen or permanent resident co-signer. For applicants 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 any time. Citizens Bank private student loans are subject to credit qualification, completion of a loan application/Promissory Note, 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.
Loyalty Discount Disclosure: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower or their co-signer (if applicable) has a qualifying account in existence with us at the time the borrower and their co-signer (if applicable) have submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, or other student loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI, and VT and some products may have an associated cost. This discount will be reflected in the interest rate disclosed in the Loan Approval Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
Automatic Payment Discount Disclosure: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
|1.25% – 9.44%*,1||Undergraduate and Graduate|
|1.49% – 11.98%2||Undergraduate, Graduate, and Parents|
|3.18% – 13.92%3||Undergraduate and Graduate|
|1.49% – 11.99%4||Undergraduate and Graduate|
|3.52% – 9.50%5||Undergraduate and Graduate|
|3.54% – 6.40%6||Undergraduate and Graduate|