Private Loans and Federal College Loans: What’s the Difference?
Private Loans and Federal College Loans: An Overview
A college education is a top priority for many people, but the ever-increasing cost puts it beyond the financial reach of many families. If you don’t have the savings to cover your or your child’s college education, you may need to check your loan options.
Key points to remember
- You can get a student loan from the federal government or from private lenders.
- Federal loans generally have more favorable terms, including flexible repayment options. Interest is generally lower and has been suspended indefinitely during the coronavirus crisis.
- Students with “exceptional financial need” may be eligible for federal subsidized loans, while unsubsidized loans are available regardless of their financial need.
Private college loans can come from many sources, including banks, credit unions, and other financial institutions.
You can apply for a private loan at any time and use the money for whatever expenses you want, including tuition, room and board, books, computers, transportation, and living expenses.
Unlike some federal loans, private loans are not based on financial need. In fact, you may need to pass a Credit check to prove your solvency. If you have little or no credit history, or a the poor, you might need a co-signer on the loan.
Private loans can also have higher borrowing limits than federal loans.
Federal student loans are administered by the US Department of Education. They tend to have lower interest rates and more flexible repayment plans than private loans. Interest on these loans has been suspended during the coronavirus crisis until at least September 30, 2021.
To be eligible for a federal loan, you will need to complete and submit the government form Free application for federal student aid (FAFSA). The FAFSA asks a series of questions about student and parent income and investments, as well as other relevant questions, such as whether the family has any other children in college. Using this information, the FAFSA determines your Expected family contribution (EFC). This figure is used to calculate the amount of assistance to which you are entitled.
The confusingly named expected family contribution (EFC) has been renamed the Student Aid Index (SAI) to clarify its meaning. It does not indicate how much the student must pay in college. It is used to calculate the amount of student aid for which the applicant is eligible. Relabelling begins in October 2022.
College and university financial aid offices decide how much aid to offer by subtracting your CFE from their attendance fees (CO). The cost of participation includes tuition, required fees, room and board, books and other expenses.
To help bridge the gap between what a particular college costs and what that family can afford, the financial aid office sets up an aid program. This package could include a combination of Pell Grants, federal loans, and work-study paid jobs. Schools can also draw on their own resources to offer, for example, merit scholarships. The basic difference between grants and loans is that grants never have to be repaid (except in rare cases), whereas loans end up.
Types of federal loans
William D. Ford’s Federal Direct Loans Program is the largest and best known of all federal student loan programs. These loans are sometimes called Stafford loans, the name of a previous program. There are four basic types of federal direct loans:
- Direct subsidized loan
- Direct unsubsidized loan
- Direct PLUS loan
- Direct consolidation loan
Note that a provision of American rescue plan makes all student loan remittances tax-free from January 1, 2021 to December 31, 2025.
Direct subsidized loans
These are intended for students with “exceptional financial needs”. The government subsidizes the interest on the loan while the student is enrolled at least part-time. You don’t pay interest on the subsidized loans until you graduate, and then you have a six-month grace period after you leave school before you have to start repaying the loan. If your loan is deferred, no interest will be charged during this period.
Direct unsubsidized loans
Unsubsidized loans are available to students regardless of their financial needs. Unlike subsidized loans, their interest starts accruing as soon as you receive the funds and continues until the loan is paid off in full.
Independent students who apply for a direct loan (as opposed to dependent students who apply with their parents) may benefit from a higher amount of unsubsidized funds.
Direct loans have several interesting advantages, including:
- No need to pass a credit check.
- A low fixed interest rate. (Private loans often have variable rates.)
- Several flexible repayment plans.
- No penalty for early repayment of the loan.
However, they also have some drawbacks, such as:
- Low loan limits.
- The need to file a new FAFSA form each year to maintain eligibility.
- Stricter limits on how you can use the money than with private loans.
Direct PLUS loans
PLUS loans are designed for parents of students and are not based on financial need. They have a number of attractive features, including the ability to borrow the full cost of the university (minus any other financial aid or scholarship). They also carry a relatively low fixed interest rate (but higher than the rates of other types of direct loans) and offer flexible repayment plans, such as the ability to defer payment until the student graduate.
PLUS loans require the applicant parent to pass a credit check (or obtain a co-signer or endorser) and reapply for funds each academic year. The parent is also legally responsible for repaying the loan.
In addition to parents of undergraduates, PLUS loans are available for graduate and professional students.
Direct consolidation loans
When it comes time to pay off student loans, the government offers direct consolidation loans, which you can use to combine two or more federal education loans into one loan with a fixed interest rate based on the average rate. loans that you consolidate.
You cannot consolidate your private loans using the federal program, but private lenders can consolidate your loans, both private and federal, by paying off your old loans and issuing a new one to you. This is often called refinancing.
Refinancing with a private lender can lower your interest rate in some cases, but you will lose the flexible repayment options and consumer protections that come with federal loans. If you have both federal and private loans, it makes sense to consolidate the federal loans through the government program and refinance the others with a private lender.
President Joe Biden and his administration have expressed support for the cancellation of $ 10,000 in student loan debt per borrower. It should be noted that this would only apply to federal loans. In addition, the Biden administration has also come up with a new, more generous income-based payment plan. This too would only apply to federal loans.