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.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.97% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate|
|2.46% – 6.97%1||Undergrad & Graduate|
|2.57% – 8.09%4||Undergrad & Graduate|
|3.02% – 6.44%2||Undergrad & Graduate|
|2.50% – 7.24%5||Undergrad & Graduate|
|2.79% – 8.39%6||Undergrad & Graduate|