Overview of Student Loans

Federal student loans and private student loans are very different.

For most student loan borrowers, federal student loans are a better choice than private student loans. Rates are typically lower, repayment options are more flexible, and cancellation options exist. Students should use federal student loans to the extent they are available—after first exploring scholarship and grant availability—and consider private loans only when federal aid isn’t enough to cover the costs of their education.

This article covers the most common types of federal student loans, and explains the most important differences between federal and private student loans.

Federal Student Loans

If you submit an application for financial aid, you might be offered loans as part of your school’s financial aid offer.

Federal Direct Loans. Federal Direct Loans are loans made by the Department of Education. The four main types of Direct Loans are:

  • Direct Subsidized Loans. Undergraduate students who can show they need financial help can get this kind of loan. The government pays the interest on a Direct Subsidized Loan during the following periods: while you’re in school at least half-time, during the grace period (in most cases), and during a period of deferment (when loan payments are postponed).
  • Direct Unsubsidized Loans. With an unsubsidized loan, you—not the government—pay the interest during all periods. Direct Unsubsidized Loans are available to undergraduate and graduate students without having to show financial need.
  • Direct PLUS Loans. Direct PLUS Loans are available to graduate or professional students who are enrolled at least half-time at a school with a program leading towards their graduate or professional degree or certificate, and to parents of a dependent undergraduate student enrolled at least half-time at an eligible school. A credit check is part of the application process, and applicants can’t have an adverse credit history. (Read about credit reports and credit scores.)
  • Direct Consolidation Loans. With a Direct Consolidation Loan, you can combine (consolidate) your federal education loans into one loan.

Federal Family Education Loans (FFELs). Prior to July 1, 2010, the federal government also guaranteed loans that private lenders made. These loans—called Federal Family Education Loan or FFEL loans—are also considered federal student loans.

Federal Perkins Loans. These loans are available to undergraduate and graduate students who have exceptional financial need. The federal government pays the loan’s interest while you are in school. Perkins Loans are available only at participating schools.

You can learn more about what types of loans you have through the National Student Loan Data System (NSLDS).

Federal Student Loans: Pros and Cons

Federal student loans have many advantages when compared to private student loans, and just a few disadvantages.

Advantages

Federal student loans are almost always a better choice than private student loans. Here’s why:

  • Federal student loans have generous and flexible repayment options that can lower your monthly payment.
  • Federal student loans have various cancellation options.
  • As of 2006, all federal student loans have fixed interest rates.
  • Federal student loans are eligible for deferment and forbearance (a temporary reprieve from making payments).
  • While private student loans require either a good credit history or a co-signer with a good credit history, federal student loans generally do not.
  • Federal student loans can be consolidated into a federal Direct Consolidation Loan. (Private student loans can't be consolidated into this kind of loan.)
  • Federal student loans don’t have a prepayment penalty fee. If you pay off your loans early, you won’t have to pay extra fees.

Disadvantages

If you go into default on a federal student loan, the federal government has more options to collect from you than a private lender. The federal government can garnish your wages without first getting a court judgment. It can also intercept your tax refund and some Social Security payments. Also, federal student loans don’t have a statute of limitations. But keep in mind that the various repayment plans available with federal student loans make it much less likely that you’ll default in the first place.

Private Student Loans

A private student loan is a loan taken out from a bank, credit union, or other private lender to cover post-secondary education expenses and—if taken out prior to July 1, 2010—not guaranteed by the federal government.

Private Student Loans: Pros and Cons

Private student loans have a few upsides, but for the most part, the long list of downsides outweighs them.

Advantages

The main advantage of private student loans is that they’re available when you’ve exhausted your ability to borrow federal loans. Unfortunately, with the rising cost of college and graduate school, many students must take out some private loans because they've maxed out on the available federal loans. (Get an overview about different ways to pay for college.)

Also, unlike federal student loans, private student loans are subject to a statute of limitations when you default. The statute of limitations varies by state, generally ranging from three to 10 years. If the statute of limitations expires, lenders have few options to collect from you.

Disadvantages

The biggest downsides to private student loans are:

  • higher interest rates (typically)
  • the interest rate might be variable
  • less flexible repayment terms, and
  • the unavailability of deferment, forbearance, and cancellation options.

In addition, paying your private student loans isn’t always straightforward. Borrowers with private student loans have cited numerous problems related to making loan payments, like dealing with loan servicers that:

  • frequently lose payments
  • misapply funds when borrowers try to pay down their loans more quickly
  • fail to notify customers when accounts are transferred to new servicers, and
  • engage in other practices that undermine borrowers’ ability to get information about and pay their loans.

If you have a complaint about a private student loan, contact the Consumer Financial Protection Bureau (CFPB).

Getting Help

To learn more about federal student loans—and student loans in general—visit the U.S. Department of Education’s Federal Student Aid website.

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