Should I Apply for Federal or Private Student Loans?

Should I Apply for Federal or Private Student Loans?

Are you a junior or senior in high school getting ready to apply for college? Maybe you have your top college choices all picked out, and you already started the application process. Either way, it’s never too early to start thinking about how to fund your college education. Most students will need to take out loans to pay for this huge expense.

One big question college students have is whether federal or private student loans are best. If you’re applying for student loans, read over our list of pros and cons for each, and use the information to decide which option is best for you.

apply for federal or private student loans

What Are Federal Student Loans?

The federal government offers different student loans to help pay for college. The most common federal student loans are offered through the William D. Ford Federal Direct Loan Program, more commonly known as the Direct Loan program, which includes four different kinds of loans.

  • Direct subsidized loans, based on financial need and available only to undergrads. While you’re still enrolled at least half-time in school, and for the first six months after you leave school, the U.S. Department of Education pays the interest on these loans.
  • Direct unsubsidized loans, not based on financial need and available to graduate and professional students as well as undergraduates. You are responsible for the interest on these loans as soon as the funds are disbursed. However, you can choose to not pay the interest during school and grace periods, causing that interest to be added to the principal amount of your loan for you to pay later.
  • Direct PLUS loans, for parents of undergrads or for graduate or professional students who need help with education expenses other loans don’t cover. Being approved for these loans is dependent on the applicant’s credit history.
  • Direct consolidation loans, which let you consolidate any federal student loans you get into one payment. Typically, you don’t become eligible to consolidate loans until after you leave school, so this isn’t something you have to think too much about until after your college graduation.

The Pros of Taking Out Federal Student Loans

There are a number of benefits to taking out federal student loans rather than private loans.

  • Several repayment plans, including income-based repayment: You have flexibility to choose which repayment plan works best for you. A commonly underutilized option is the income-based repayment plan. This bases your loan payment amount on how much you’re making after graduation, allowing you to have manageable loan payments while also balancing your other post-grad expenses.
  • Loan forgiveness: If you enter a program-qualified underrepresented field or go into an area in dire need of your services, you may have your debt paid after you’ve worked in the field for some time. For instance, teachers or doctors who go to rural, poverty-stricken areas may qualify for loan forgiveness.
  • Deferred payments: You may be able to temporarily place repayment of your loan on hold if you re-enter school, such as going back for a master’s.

Limitations of Using Federal Student Loans for College

There are certainly some compelling reasons for choosing federal student loans. But you’ll also find some limitations you’ll need to plan for, including the two below.

  • Caps on loan amounts: The money you can borrow is limited. That amount will depend on what type of loan you’re eligible for and how much federal student loan money is available to be disbursed to students at your school.
  • You have to start paying on the loans if you drop below part-time: Some people work while in school and may spread their college career over a longer period than four years. You should be prepared to start paying back your loans, if you drop below minimum standards, which have different definitions depending on how your school measures academic progress. For example, some look at credit hours while others may define in terms of semesters, trimesters, or quarters.

Pros of Taking out Private Student Loans

Now that you’re a bit more familiar with federal student loans, let’s take a look at your other option –private student loans. You can secure these through a variety of lenders. Here are a few advantages of borrowing from a private institution.

  • Higher caps: You can generally take out more money than with a federal loan, which can be helpful if your educational expenses exceed the federal student loan money you’ve been approved for. However, even though you can typically get higher amounts of private student loans, it’s very important to not take out more than you need and to be realistic about your ability to pay these loans back after graduation.
  • You can shop around: Private lenders may compete for your business, so you can shop around to find the best interest rate and most favorable terms. Keep in mind, however, that most private student loans are going to have interest rates higher than federal student loans without all of the benefits federal student loans provide.

Cons of Getting Private Loans for College

Here are a couple of things to watch for when considering applying for a private student loan.

  • You usually need a co-signer: This means asking mom, dad, or another trusted relative to sign for the loan with you, tying you together for the length of the lending period. This means the loans you qualify for may be based on your co-signer’s credit and, if you neglect to pay back your loans on time, you won’t just be hurting your credit, but also your co-signer’s.
  • Variable interest rates: While federal loans have fixed interest rates based on which year they were disbursed, most private student loans are variable, which means the rate can go up or down. This can make budgeting a challenge and cause you to pay considerably more in interest.

The right loan for you will depend on your individual circumstances, the field you plan to enter, your family’s financial situation, and many other variables. Be sure to examine each option in depth to determine the right choice for you and what will be most manageable to pay back after graduation.

You can also find more tips for saving and planning for college on our blog.

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