Savings & Investment, Student Loans

Great Student Loans: Federal vs. Private Borrowing Choices

After receiving tuition information from colleges and universities, some people give up on the idea of higher education. Tuition prices increase every few years, and with some parents unable to help with the cost, college becomes a dream.

But going to college isn’t about having a huge bank account or the ability to write a check for the entire cost of tuition. If so, more than half of college students would never step foot on a campus. There is no shortage of financial aid, with countless students qualifying for grants and scholarships. Maybe you don’t meet the criteria for these programs, but other options are available.

A student loan can provide the cash you need to get an education. There are plenty of great student loans. To take advantage of financial aid, you have to know what’s available. There are two main types of student loans – federal and private. Understanding how these loans differ and knowing your choices can help you make the right borrowing decision.

What is a Federal Student Loan?

A federal student loan is a loan funded by the government. These loans are available to anyone. There is no credit check for most federal student loans, nor do they require a cosigner. Federal loans feature a low, fixed rate, and in most cases, repayment does not begin until after graduation. Federal aid includes several great student loans, such as:

  • Direct Subsidized and Direct Unsubsidized Loans: Fixed rate loans for undergraduate and graduate students. Students must attend college at least half time. These loans do not require a credit check or cosigner.
  • Federal PLUS Loan: A fixed rate loan that helps graduate students and parents of undergraduates pay for college. Applicants can borrow up to the cost of educational expenses, minus any other financial aid. There is a credit check.
  • Federal Perkins Loan: A need-based loan to help undergraduate and graduate students with educational expenses. This loan is available to students with financial hardships.

To apply for a federal student loan, complete and submit the Free Application for Federal and Student Aid (FAFSA).

What are Private Loans?

Federal funding isn’t the only option for higher education, and unfortunately, there are limits to how much you can borrow from the government each year. Therefore, some people seek private lending options to cover additional educational costs. Private loans can also be great student loans, but they aren’t as flexible as federal loans.

For example, private loans typically feature higher interest rates than federal loans. Getting a private loan also requires passing a credit check. Students who apply for a loan with no prior credit history will need a cosigner, and unfortunately, some private lenders require repayment while in school.

There are different borrowing options available. Whether you’re a graduate or undergraduate, several banks and credit unions offer private loans that cover up to 100% of education costs, minus any other financial aid. These include lenders, such as Wells Fargo, Sallie Mae, Discover and PNC. Student loans are not created the same. Before applying for any private loan, compare program features and interest rates.