A student loan helps students pay their higher education tuition fees and living expenses while pursuing higher education. Federal loans are given by the Federal government while Private student loan is given by private financial institutions like a bank, a credit union, and other lending institutions. Both loans are different, and they have their advantage and disadvantages when compared. Here is a comparison that every student needs to know regarding the loans.
Federal student loans
Loan repayment period
Students start paying their federal loan for students [https://studentaid.ed.gov/sa/types/loans] after they complete their higher education. In case they encounter difficulty meeting the loan repayment terms, the federal government allows them to temporarily defer the repayment period or lower the installments to an amount that the student can manage to pay.
The federal student loan has many repayment options which allow students to choose a plan that suits their financial ability. Furthermore, students who pay their loan early do not pay an early payment penalty.
Federal student loans have a fixed interest rate. A fixed interest rate is that which does not change over a given time. The interest rate for the Federal student loan is lower compared to that of private student loans and other loans.
Undergraduate’s Federal Student loans are charged a fixed interest rate of 3.76%. Student loans for graduates and professional students are charged an interest rate of 5.31% and 6.31% depending on the type of loan for students [https://studentaid.ed.gov/sa/types/loans/interest-rates].
Advantage to financially needy students
The Federal student loan is an ideal solution for students from economically challenged backgrounds. The students are given a subsidized Federal loan whereby the Federal government reimburses the interest. This makes loan repayment easy.
The government does not use a student’s credit history to approve the Federal student loan. However, the loan has an impact on the student’s credit score. Therefore, students who pay their loan on time stand a chance to an improved credit score while those who default or pay their loan late will have a lowered credit score.
Federal student loans have a loan limit which dictates the maximum amount a student can borrow. For this reason, students whose spending exceeds the loan limit are required to supplement the loan with alternative funding sources.
Private Student Loans
Unlike Federal student loans, the loan repayment period may start while the student is still in school. The repayment plan depends on the lender. Therefore students should consult with their lender to know the repayment options that exist. Some lenders can also charge a prepayment penalty fee.
A private student loan’s interest rate differs depending on lenders. The loans have a variable interest rate which can exceed 18%. Variable interest rates increase the amount one pays, a factor that can make loan repayment difficult.
Implications for financially needy students
Private student lenders do not have individual plans that cater to needy students. It implies that the loans are not subsidized, and a student has to repay back the loan in full.
Just like any loan, private financial institutions run a background check on a student’s credit score before the lender approves a loan. Students with low credit score stand a risk of being denied a loan. If a lender decides to give students with poor credit score a loan, the loan will have a relatively high interest rate and strict loan repayment terms.
The advantage with a private student loan is that students have the freedom to borrow as much as their credit worthiness can allow. Students with a good credit history and whose spending is higher than what the Federal student loan caters for can take a private loan for students [http://www.consumerfinance.gov/askcfpb/545/what-are-main-differences-between-federal-student-loans-and-private-student-loans.html] to fund their studies.
Financial experts advise students to finance their higher education with federal student loans before they consider taking a private student loan. It is because Federal student loans offer student friendly protections like flexible repayment and forgiveness plans. Private student loans are significant to those students who need more money to fund their studies. A private loan may be a good choice for students’ who are learning in institutions that are not in the Title IV student aid funds category.