Private Student Loans and Federal Student Loans Compared

If you need a loan to attend college, you basically have two main options — a private student loan or a federal student loan. Each of these has their pros and cons; although it is generally easier to apply for and qualify for a federal loan as many private lenders will require an applicant to have good credit.

Federal student loans are the largest source of college funding in the United States and have several advantages. Not only do they usually have lower interest rates than others, but the interest may be paid by the government while you are at school. The fees and the interest rates are standard and don’t vary by lender — eliminating time spent in shopping around and comparing options.

And they also tend to have flexible options for repayment, including consolidation and the option of not repaying until you are employed. Federal student loans also usually have the option of a longer repayment term, making them ideal for those graduates who don’t immediately find employment, or those who don’t earn enough money to pay it back quickly.

The most common federal loans are probably the Stafford and the Perkins, both of which are based on the needs of the applicant. If you qualify for it, the Perkins loan is probably the most attractive option, designed for those with exceptional need. It has a low interest rate of 5% and allows an undergraduate student to borrow up to $ 4,000 per year; $ 6,000 is available for a graduate student. It also has a generous repayment period of up to 10 years.

The Stafford loan is flexible in that it can be subsidized or unsubsidized; and the interest is paid by the government during school, during the grace period and during deferment. Stafford’s do have a small origination fee, although this will be eliminated by July, 2010. The interest rate on the Stafford-loan is the same, regardless of the lender you choose, although some lenders offer a small discount for electronic payments and on time payments.

Private student loans don’t require the applicant to complete any of the often lengthy and complicated federal financial aid forms. Repayment options on these can also be flexible, sometimes giving you the option of repaying immediately after graduating. Many people who aren’t able to qualify for enough federal borrowing amounts end up using a private student loan; and for those with credit that isn’t good, they allow for a cosigner on the loan.

However, private student loan are nearly always more expensive than federals, not only is the interest rate higher, it is usually variable as well. Private-loans are almost always based on an applicant’s credit score, rather than their educational needs — in general, if you have a credit score of less than 650, its unlikely that you will be approved for a private student loan.

Whichever student borrowing option you choose, keep in mind that you have to pay it back at some point! Never borrow more than you really need, or will realistically be able to easily repay.