When we discussed student loans, you mentioned federal and private student loans. But what is a Federal Student Loan?
Federal student loans are funded by the federal government. They have a fixed rate of interest, and their terms and conditions are set by law.
Students with a financial need may even qualify for a subsidized loan, in which the government pays a portion of the interest.
And what is a Private Student Loan?
Private student loans are offered by banks, credit unions, etc. Their terms and conditions are set by the lender.
The rate of interest could be fixed or variable, and is usually higher than the rate on federal student loans. Most private student loans are not subsidized.
Is there a difference in the eligibility for Federal and Private Student loans?
Most students are eligible to get a Federal student loan as they do not require credit checks or a cosigner.
Private student loans on the other hand are approved based on credit history, so the loan application can greatly benefit from having a cosigner with a good credit score.
Is there a difference in the repayment terms between Federal and Private Student loans?
The duration of the loans are similar – typically 10 years.
However, with a federal student loan, you start paying back your student loan after graduation, with the possibility of a 6-month grace period that gives you enough time to find a job before you’re burdened with debt repayment.
For many private student loans, the payment can start while you are still in college.
Are there any other differences between Federal and Private Student loans?
Federal Student loans do not have any prepayment penalties, and some portion of your loan can be forgiven if you work in public service.
For Private Student loans, prepayment penalties depend on the terms of the loan, and typically, there is no loan forgiveness.