Federal and private student loans - Differences change everything

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By: Good Nelly
on 26th Aug,2015

This is the time to take the next big important step in your life.
Federal and private student loans - Differences change everything


The college admission season is in its full swing. This is the time to take the next big important step in your life. This is the time when you leave your school and start preparing yourself for the college life.

Although it is very hard to get admitted into the best college of your city, yet it is doubly hard to finance the 4 years of your life for flourishing your career. The college tuition cost has almost become double in the past 25 years. Students have to pay nearly $22,000 on an average in a single year. So, it doesn't take a lot of imagination to guess how much students have to pay for finishing their studies.

It has almost become impossible for the college students to become a graduate without taking out loans. Almost two-thirds of the college students have to take out loans to enhance their educational qualification.

Educational loans can be broadly classified into 2 broad categories - federal and private. Federal student loans are offered by the government whereas private loans are given by the banks. Check out some of the key differences between the 2 types of loans.

1. Fed charges less than the private lenders: You've to pay fixed interest rate on the federal student loans. The interest rate on subsidized Stafford loan is 3.4 percent. On the other hand, the interest rate on Perkins loans is 5 percent. Plus Loans are offered at 7.9 percent whereas unsubsidized Stafford loans are available at 6.8 percent.

Private lenders charge a higher interest rate than that of the federal government. Moreover, some private student loans are offered at variable rate of interest.

2. Fed gives a breathing space to the borrowers: Fed expects you to start making payments after passing out from the college. On the other hand, you're requited to start making payments right after taking out the loan. If you fail to make the payments, then your credit score will drop.

The repayment plan of the private student loan is difficult for yet another reason. You may have to pay a prepayment penalty if you decide to repay the loan quickly and avoid the additional interest rate.

3. Private lenders offer a strict repayment plan: Fed may forgive a portion of your debt if you volunteer for Peace Corps, AmeriCorps or at some other public service organization. Apart from that, there are variety of repayment plans such as forbearance, consolidation, deferment, income based repayment plan, etc. to pay off your federal student loan. Your loan will also be totally forgiven after your demise. 

The private student repayment plans are really very tough. Most of the loans don't offer consolidation or flexible payment plans. Sometimes, borrowers need to brig a co-signer to obtain private student loans. If the borrower is not able to stick to the payment plan, then the co-signer will be in big trouble. The co-signer will be required to repay the loan on behalf of the borrower.

You must have clearly understood by now that federal student loans are better option than that of the private ones. However, it does make sense to take out private student loans at certain times. For instance: if you're confident about getting a lucrative job and paycheck after completing your program. You can also borrow from a private lender when you plan to use money for taking proper care of your financial health.


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