Comparing Private and Federal Student Loans

The cost of a college education can place a significant burden on college students and their families, and college tuition is only continuing to rise by the year. If you are a prospective student or a parent of a child planning to attend university, then you may be looking for ways to fund the cost of college tuition. One of the key ways to borrow money to cover college tuition is through student loans. There are two main types of student loans: federal and private. Understanding the differences between these two students loans, namely the benefits and drawbacks of each, is important as you decide what makes the most sense to finance the cost of your or your child’s education. Continue reading for a comparison of federal and private student loans.


Let’s begin with federal student loans. As you might have assumed from its name, the government funds federal student loans, and they do so as part of eligible students’ financial aid packages. In order to be eligible, a student must be attending a participating higher education institution and be enrolled at least half of the time in a degree or certificate program. There are three main types federal student loans: direct subsidized, direct unsubsidized, and direct PLUS. These vary with regard to terms like loan size, interest charges, and whether they require students to show financial need. Direct PLUS loans are specifically for parents looking to help their children pay for school. The good thing about federal student loans is that they provide solid benefits, particularly with regard to repayment, as well as low interest rates and no credit history requirement. However, the biggest drawback is that there is a borrowing limit, so your federal student loans may not always cover the full amount to cover tuition.


Private student loans, on the other hand, do not come from the government. Instead, these loans come from banks, credit unions, or other financial institutions. In order to qualify, a student must be attending an eligible college or university and be enrolled in a degree program. Unlike federal students where the only term options are those that come from the government, you as a borrower have many lenders to choose from, so you can assess all of your options before deciding. The great thing about private student loans is that there are no borrowing limits, so you can borrow enough to cover the full cost of college tuition. Additionally, private student loans offer both fixed and variable interest rates, as well as various repayment terms. However, private student loans do come with their own set of downsides, namely higher interest rates and no federal benefits. Additionally, these loans do require a credit history, so as a student, you may need to rely on someone else to cosign.


Now that you’ve assessed the pros and cons of both federal student loans and private student loans, how do you determine the best option? The real answer is that it depends on your financial circumstances, personal preferences, and more. The most important thing to remember, however, is that these are not mutually exclusive. You can always start with a federal student loan and pursue a private loan student if you still need to borrow more money to cover the cost of college tuition!