Choosing between Federal and Private Loans
Federal loans should be a student’s first choice when considering their borrowing options for college. However, many times federal loans are just not enough to cover the costs of college, which is where private loans can come into play.
The types of student loans vary. The following are important terms students should know before they begin to shop.
Private Student Loans — Loans given by banks and credit unions.
Federal Student Loans — Loans given the U.S. Department of Education.
Fixed-Rate Student Loans — The amount of interest charged on your loan doesn’t change.
Variable-Rate Student Loans — Interest rates depend on the market and can change over time.
Some students may NOT be eligible to receive federal loans because they:
- are not U.S. citizens
- are convicted of a drug offense
- are in default on a federal student loan
- don’t maintain satisfactory academic progress in college
More on Private Loans
Private student loans typically let you borrow more money than federal loans, and offer a variety of interest rates, fees and other borrower terms. Some are variable-rate loans linked to market conditions, while other are fixed-rate. Some lenders require students to make payments while they are enrolled, while many others allow students to pay later, or offer a grace period where payment is not required, until after graduation. Often students are the primary borrower of these loans and generally will need a credit-worthy co-signer, such as a relative or friend, to ensure they are approved for the loan.
Eligibility and Application Process:
Often private loans require you to have an established and decent credit score to be eligible. Most students straight out of high school have yet to establish credit and therefore will require a co-signer. A co-signer is someone with good credit standing who agrees to be your guarantor or be financially liable for you during the life of your loan. Generally speaking, the better your – or your co-signer’s – credit, the better your private student loan terms. Private loans may have higher loan limits and more generous loan cap amounts than federal loans for these borrowers. Private lenders may require a certification from the school in order to determine the maximum amount of money, or cap, they will offer to lend you. This is based on the cost of attendance minus any other aid you may already be receiving. Each private lender will set the terms, conditions, and eligibility requirements for the loans they offer.
The application process may also differ from lender to lender. Many have the option to fill them out electronically on their individual website. You will generally need your name, date of birth, school information, Social Security number, and income or tax information to apply. Most private lenders will perform a credit check to determine your eligibility. Private lenders do not publish the rate you will receive before the application is complete, so you should apply for more than one in order to determine which one offers the most favorable terms.
Once you have been approved, the lender will send you a letter detailing the terms and conditions of your loan. The money is not disbursed until you accept these terms and sign a promissory note that details your rights and responsibilities as a borrower. This note is a legally binding contract between you and the lender in which you agree to repay your loan and all interest accrued. Be sure to keep a copy of your promissory note for your records.
Loan Disbursement Information:
Generally speaking, loans are disbursed directly to the school and used to pay education-related expenses. This means that the loan will cover your tuition and fees and then, if there is any money left over, it will be disbursed to you to cover any other outstanding educational expenses. Depending on the type of loan offered by your lender, after tuition and school fees are covered, you can use a private student loan to pay for:
- Room and board
- Computer equipment
- School supplies
- Dependent child care
Loans are generally based on the total cost of attendance at a school, which is not limited to just the cost of enrollment. When applying for a private student loan, you should only borrow however much you actually need which may be less than the amount offered to you. It can be very easy to get into debt quickly and difficult to dig yourself out.
More on Federal Loans
- Federal loans are typically fixed and have low interest rates. Occasionally, these loans are subsidized, meaning the federal government pays the interest on the loans while students are enrolled or even for several months after graduation. In order to receive federal loans, applicants for aid must complete the FAFSA (Free Application for Federal Student Aid).
- Direct Loans are the most common federal loans. Undergraduate students may qualify for some or all of their Direct Loans to be subsidized depending on their financial need and their continued academic progress, while both undergrads and graduate students are eligible for unsubsidized Direct Loans without demonstrating financial need. The amount of Direct Loan funds students can borrow varies based on year in school and the aggregate amount of federal loans funds already borrowed.
- For students who demonstrate exceptional financial need, Perkins Loans can provide a subsidized, low-interest solution to covering college costs. Perkins Loans are extremely limited, though—they make up roughly just 2% of all disbursed federal aid.
- Parent PLUS Loans allow parents of undergraduate students to borrow federal loan funds at a fixed interest rate. These loans also have relatively high borrowing limits.
- Students enrolled in graduate or professional program students can borrow a fixed interest rate loan called a GradPLUS Loan. Typically, graduate students maximize Direct Loans before borrowing GradPLUS Loans. Similar to Parent PLUS Loans, GradPLUS loans have high borrowing limits.
What Loans Cover
Typically student loans can cover the cost of attendance: tuition, fees, books, supplies, room, and board. Student loans are NOT designed to pay for things that aren’t essential to the school experience. But private loans might be used to cover expenses such as computer supplies, internet services, parking fees, and so forth.