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  • Writer's pictureLisa Gosweiler

What Are Some Benefits of Federal Student Loans Vs Private Student Loans??

There are many benefits that Federal Student Loans provide Vs the Private Student Loan system - all are important to understand before a borrower makes a decision on which type of loan is best for their situation.

  1. Lower Interest Rates: Federal Student Loans typically have lower interest rates for undergraduate borrowers than do private student loans. This is because students often have very little credit history and better interest rates are reserved for borrowers who have income and good credit history. However the amount of money an undergraduate student can borrow in the Federal System is capped for each year of school - 27000 total - and often this small amount of loan access is not enough to cover tuition and room and board for the student.

  2. Fixed Interest Rates: Federal Student Loans all have fixed interest rates - meaning that the interest rates will not change over the life of the loan. Private Student Loans often have variable interest rates which can make it difficult to predict how much you will owe in the future.

  3. Credit Check or Cosigner Requirements: Federal Student Loans do require a credit check but currently any borrower qualifies with approximately a 600 point credit score - the lowest in the current industry. Private Student Loans often base their credit checks on higher income to debt ratio calculations and a much higher credit score. Private loans also often require a cosigner for student borrowers who may have limited credit history or lower credit scores. Federal Loans have only one borrower and do not allow cosigning.

  4. Income-Driven Repayment Plans: Federal Student Loans offer income-driven repayment plans which are programs that calculate the monthly payments for the loan based on your income and family size. This can help make your monthly payments more affordable especially for lower or middle income borrowers. Private Student Loans are not required to offer any income based repayment options.

  5. Loan Forgiveness Programs: Many Federal Student Loans offer qualification for Loan Forgiveness Programs, such as Public Service Loan Forgiveness - which allows borrowers to have their remaining loan balance forgiven tax free after making 120 qualifying payments while working for a qualifying public service employer. All Income Driven Repayment Plans qualify borrowers who pay monthly payments for 20 or 25 years depending on their program to receive forgiveness of the balance of their debt as well. These Loan Forgiveness Programs do not exist in the Private Loan Industry.

Overall Federal Student Loans tend to be a more affordable and accessible option for students than private student loans - and, even if parents may be able to obtain a lower interest rate in the private industry, it is often much more beneficial for parents to utilize the federal system in order to take advantage of the generous repayment and forgiveness plans open to all borrowers in the system. One other benefit of the federal program is that the death of any federal loan borrower requires that their entire loan balance be forgiven tax free and not passed on to their estate or family for repayment. Again this is not a common practice in the Private Loan Industry.

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