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Private vs. Federal Loans: Defining The Difference

Jan 11, 2010 Jennifer Williamson, Distance Columnist | 0 Comments

There are two general types of student loans: federal and private. Federal loans include Plus, Stafford, and Perkins loans. These loans all have different terms—and some are subsidized by the federal government, making their interest much lower and guaranteeing it doesn’t accumulate while you’re in college.

However, because federal loans are not available to everyone, students often have to take out private loans to cover some college expenses. There are many differences between federal and private loans—and here’s an overview.


It’s a different application process  

The application process for federal loans is often considered onerous. Students have to fill out the FAFSA, a long form with complicated questions regarding assets, savings and income. Many people find the form confusing, and a misstep could result in fewer federal aid dollars available—so the stakes are high. Private loans are much easier to get—you can usually apply by phone or online fairly easily.

Federal loans are given based on your income. Private loans check your credit.

Federal student loans are need-based financial aid. They’re not a grant—you still have to pay them back—but the repayment terms are generally much kinder than you’ll find with private loans. Of course, the government doesn’t want to give this help to people who don’t need it—so they check your income first.

By contrast, lending firms that offer private student loans only care about your credit score. In past years, you could get a private loan fairly easily even with bad credit; since the economy crashed, however, these lenders are being a bit more selective about who they will loan to.

Federal loans usually have better terms than private loans

There are several different types of federal loans with varying terms—the lower your income, the more eligible you are for loans with better terms. All have fixed interest rates, however, and most have interest that doesn’t go above 6.8%. Private loans, however, have variable interest rates—meaning the interest rate on your loan could change at any time. In addition, private loans carry a much heavier interest burden than public—sometimes as much as 19%.

Private loans can’t be consolidated with federal loans

Under a consolidation plan, all your multiple loans are replaced with a single loan with a single fixed interest rate—which can help you lower your payments, especially in a year when interest rates are low. However, you can only consolidate federal loans; private loans are ineligible for federal consolidation. While there are ways to consolidate your private loans as well, they are not government-guaranteed and this form of consolidation is less likely reduce your interest—or even get you a fixed interest rate—than consolidation for federal loans.

Private loans often aren’t eligible for federal forgiveness programs

Federal loan forgiveness programs generally apply only to federal loans. This includes income-based repayment programs and debt forgiveness programs for students who work in public service, teach in low-income or high-needs areas, or go to work for organizations like AmeriCorps.

There is no statute of limitations for federal loans

When it comes to collecting on their debt, the government has a lot of clout—and it exercises privileges that most lenders don’t have. A federal loan can’t be forgiven in bankruptcy, and it has no statute of limitations—so no matter how long ago you took out the loan, you have to repay it.

Private loans, however, generally are not included in laws that make student loans exempt from statewide statute of limitations laws. In most states, your private loans should be covered under the same statutes of limitations that apply to other kinds of debt in your state—although you should always consult your state laws or a lawyer on your specific situation if you’re in delinquency or considering bankruptcy.

In general, private loans are much more difficult to pay off than federal loans. Some finance experts recommend that students take drastic measures to pay off their private loans first—anything from living with parents for several months or years to getting a second job or living drastically below their means to get those loans paid off soon. Even if you’re not ready to take such extreme measures, however, there’s no question that you should be trying to pay off your private loans first—while paying only the minimum on lower-interest public loans until the private loans are paid off.


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