The Differences Between Federal and Private Student Loans

Student Loan Debt: The Differences Between Federal and Private Loans

For most students, the college acceptance process involves both an admission and financial aid application. In 2018, the average college student completed school with over $29,800 in student loan debt, because grants, scholarships, and savings were not enough to cover the cost of rising tuition. Nearly 70% of all college students rely on student loan debt to cover the difference.

Federal and private student loans are the two primary lending sources available to students. Here is an overview of the differences between both options.

Federal Student Loans Versus Private Loans

The process of receiving federal assistance begins with the FASFA form, which establishes the EFC (Expected Family Contribution) and will determine eligible grants and loans.

Schools often require the FAFSA for all forms of aid, including private student loans and school sponsored scholarships.

Subsidized and Unsubsidized Loans

Subsidized Student Loans are available to undergraduate students demonstrating financial need. The loans do not accrue interest while in school at least half time, during the initial six-month grace period granted after leaving school, and during deferments.

Unsubsidized Loans will accrue interest from the time of loan distribution. Interest increases the loan balance if you do not make interest payments while in school.

Loan Limits

Federal Student loans have annual and aggregate loan limits, based student status, the cost of attendance (COA), year in school, and the expected family contribution (EFC). The limits on federal loans are as follows:

Year at School Dependent Students Independent Students
1st Year Undergraduate $5,500, with a maximum of $3,500 in subsidized loans $9,500, with a maximum of $3,500 in subsidized loans
2nd Year Undergraduate $6,500 with a maximum of $4,500 is subsidized loans $10,500, with a maximum of $4,500 in subsidized loans
3rd Year and up Undergraduate $7,500, with a maximum of $5,500 is subsidized loans $12,500, with a maximum of $5,500 is subsidized loans
Graduate or Professional Students All graduate students are considered independent $20,500 per year
Aggregate Loan Limits $31,000, with a maximum of $23,000 in subsidized loans $57,500 for undergraduates with a maximum of $23,000 in subsidized loans.

$138,500 for graduate or professional students

Two Notes to Know on LOAN LIMITS

  • Those who cannot qualify for a PLUS loan can receive higher loan limits equal to that of independent students.
  • Aggregate limits include outstanding balances only. You can pay down the loan to qualify for additional amounts.

Private Loans: All private loans are unsubsidized. Lenders set loan limits based on the cost of attendance (COA) minus other aid the student receives.

Interest Rates

Congress sets the interest rate on federal student loans, which run from June to June each year. Lenders set private loan rate based on the market, which can be as high as 14.24%.

Repayment Options

In 2010, the Federal Government extended repayment plans to include income-based options and extended terms. Instead of repaying the loan in ten years, you can enroll in one of the new repayment plans and make payments for up to 25 years.

Private loans typically require repayment over seven to 15 years, with some higher loan amounts extending payments to 30 years.

Loan Forgiveness

Federal loans allow some borrowers to qualify for loan forgiveness. Former students must meet the requirements, which can include working in certain industries, making payments for the required number of years, and death or permanent disability.

Most private loans do not offer loan forgiveness.

Help During a Hardship

In the event of unemployment or other financial hardship, you could receive a forbearance or deferment. Loan delinquencies do not get reported until you miss three months of payments and a loan default does not occur until fail to make a payment for 270 days. The loan servicing company offers specific steps you can take to get your loan out of default.

Most private loans do not offer hardship benefits.

Collection Authority

The federal government has extensive means to collect on a defaulted loan, including wage garnishments, confiscating tax refunds, and garnishing social security income.

Private banks issue private student loans, making them more like a traditional loan in qualifying, repaying, and collecting on delinquent debt. Borrowers must qualify for the loan based on credit and income, making them more difficult to get. Loans typically accumulate interest upon distribution, and in many cases, you must make payments while in school.

Final Thoughts

You should always utilize federal student loans before accessing private loans to gain lower interest rates, flexible repayment plans, and other benefits offered through federal loans.

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