If you're like most students heading to graduate school, you may need some sort of financial aid to help pay for your education. And like many others, a large number of you will turn to student loans to help finance your education. As you may already know, there are two categories of education loans: federal and private. What are the differences between these two categories of loans? How are they similar? Read on to learn more.
One difference between federal and private loans is where the money comes from. With federal loans, the loans are part of one of two federal programs. The first program is called the Federal Direct Student Loan Program (FDSLP). With these Direct Loans, the U.S. government provides the funds directly to the students and their parents.
The second program is called the Federal Family Education Loan Program (FFELP). Private lenders such as banks, credit unions, and savings & loan associations provide FFELP loans, while the federal government guarantees these loans against default. Both federal loan programs offer Federal Stafford Loans and Federal PLUS Loans, the most commonly awarded federal student loans.
Lenders such as banks, credit unions, and savings & loan associations provide private loans. The federal government regulates private loan programs, but the loans are provided and guaranteed by private lenders and guarantors. Private loan programs will vary by lender.
Eligibility requirements for federal loans offer a number of differences when compared with private loans. For instance, Federal Stafford Loans do not require credit checks. Though credit requirements vary by lender, you'll be hard pressed to find private loans that don't require you to pass a credit check. Note: Federal PLUS Loans do require a credit check, however the credit criteria is less stringent than what is used by many private student loan programs.
Also, to be eligible for a federal loan, you must be a U.S. citizen/national, or eligible noncitizen. Some private loans may offer options to international students who do not qualify for federal loans.
How much you can borrow also depends on which type of loan you borrow. Federal Stafford Loans made through both the Direct and FFELP loan programs offer subsidized loans (the government pays the interest on your loan while you are in school) and unsubsidized loans (you are responsible for all the interest, including during the time you are in school) with preset limits. As of July 1, 2007, graduate students can borrow up to $20,500 of Federal Stafford Loans per year, $8,500 of which may be subsidized. However, you generally may not borrow more than the $138,500 aggregate (cumulative) limit for both undergraduate and graduate education.
Federal PLUS Loans do not have aggregate loan limits. And, borrowers can borrow up to the annual cost of attendance, less other financial aid, as certified by the school.
Some private loans will have set limits on how much you can borrow; however, it is much more common for private lenders to have variable loan limits that are based on an amount set by your school.
It pays to do your homework when it comes to education loans, both federal and private. The fees you pay at application can vary. For Federal Stafford Loans, the fees at application can be as high as 3%. Some lenders, such as Access Group, offer loans with no origination fee; this means more money for school, since none of your loan will be used up front to pay fees.
The same applies to private loan fees. Researching different student loan providers can save you up to 6% - not all lenders offer student loans with fees as low as 0%.
Note: The federal government mandates that all lenders collect the 3% origination fee on Federal PLUS Loans.
When it comes to interest, Federal Stafford Loans have some benefits you usually can't find with private loans. For instance, you may be awarded a subsidized Federal Stafford Loan. If you are awarded the subsidized Federal Stafford Loan, the federal government pays the interest on that loan while you are in school.
And, unlike many private loans, the interest rate on Federal Stafford and Federal PLUS Loans is fixed, as opposed to variable. That means that during periods of high interest rates your loans would still have the same loan rate.
Note: Federal Stafford Loans first disbursed after July 1, 2006 have a fixed interest rate of 6.8%. If you have older loans, your interest rate on those loans is variable.
You may also get a break when filling out your tax return: you may be able to deduct some of the interest you pay on both Federal Stafford and Federal PLUS Loans.
Private loans tend to have somewhat (and in some cases, significantly) higher interest rates than federal student loans, and may use your credit score as a basis for determining your particular interest rate. Additionally, there is no such thing as a subsidized private loan; you are responsible for all the interest.
Federal Stafford Loans offer a grace period of 6 months. That means that once you graduate, or cease to be enrolled at least half-time (as determined by your school), you won't be required to make a payment on your loan for 6 months. Most private student loans also have a grace period of up to 6 months. Access Group private loans have a 9-month grace period. Federal PLUS Loans do not have a grace period, however some loan providers such as Access Group offer forbearance for up to 6 months after graduation to align with the start of repayment for Federal Stafford Loans.
The federal government has also put certain "safety nets" into place if you are faced with a situation where you can't make your loan payments. You can apply for deferment and/or forbearance to temporarily postpone or reduce your monthly payments. As with grace periods, deferment and forbearance options will vary by lender, so make sure your lender provides you with options if you find yourself in a situation where you are temporarily unable to make payments.
Repayment plans differ by loan provider for both federal student loans and private loans. Depending on your provider, both federal student loans and private loans may be eligible for payment incentives and/or discounts. Be sure to explore what different providers offer.
www.finaid.org
www.ed.gov |
