06.06.07 | Federal vs. Private Loans
Why does it matter if I qualify for a Federal Loan? I can just take out a Private Loan and have the funds disbursed directly to me. What’s the difference between federal and private? I mean, I have to pay the money back anyway, right?
It’s true you do have to pay the money back regardless, but if I asked you a simple question like would you rather pay me back $20 or $50 for my services, which would you choose? If you value your hard earned dollar you would choose $20. That’s why you should take the time to complete your FAFSA and see if you qualify for federal loans, like a Stafford loan. Stafford loans are fixed at lower interest rates than private loans. That said, private loans have benefits too.
Let’s review some pros and cons for both and determine the best option for you.
| Federal Loans | Private Loans |
|---|---|
| Requires you to complete a FAFSA | No FAFSA required |
| Awarded on a need basis as mandated by the Department of Education | Awarded on credit history (may require a co-signer) |
| Funds are disbursed directly to the school and must be used toward the COA only | Funds are disbursed directly to you, generally within 5 business days, and may be used as you deem necessary |
| You are capped by the Federal government by how much money you can borrow on a yearly basis | You can usually borrow significantly more funds thru private loans rather than thru federally regulated loans |
| You may defer your payments while in school and have a 6 month grace period thereafter | You may defer your payments while in school, but have no grace period. |
| In some cases you may have your federal loan forgiven, and also have up to three years during the repayment process to defer your loans; economic hardship & going back to school are the most common reasons for loan deferment | No forgiveness option available, and far more stringent rules apply regarding deferment of payments |
| Fixed Interest Rate on Perkins, Stafford, and Plus loans | Variable interest rates which are generally 2-5% higher than federal loans |
| Regulated by the Federal Government | Regulated by Private Consumer Banking Regulations |
| 10 year loan repayment term | Loan term determined by the amount borrowed |
The Student Loan Help blog is sponsored in part by:
noxtheking…
Have you been blogging long? %TTITLE% is a great blog, you have a great writing style too. Found this post last Tuesday and i’ve been reading your blog since. I’ve subscribed to your RSS feed and I am excited for more quality posts like this one
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February 2nd, 2009 | #
Thank you very much. I appreciate the compliment. I try to come up with topics that I feel will apply to the masses and explain it in a basic way. Of course since this blog was posted things have changed a lot. The prime has fallen from 6% to 3.25% while federal loans remain in the 6-6% range making private loans a more viable option.
February 4th, 2009 | #
thanks dbonvie this information was very useful for me
August 3rd, 2009 | #