Federal loans are funded through the government. These are regulated fairly strictly. To qualify for federal loans, you’ll have to fill out a FAFSA. On the other hand, private loans are—unsurprisingly—not subsidized by the government. If you opt for private loans, you ought to check with the schools you want to attend.
Not all schools work with the same private loaners, so you want to make sure your loan business and school are compatible.
Some schools can’t easily provide this info – if that’s the case, you can check with the lenders instead as they will know for sure whom they do business with. Once you’re sure that your school and lender are compatible, you’ll apply through the lender.
For most federal student loans, your credit history (and that of your parents) is not factored into is not factored into your aid package. However, most private lenders will ask about your credit history, and it can definitely influence the amount they’re willing to loan you.
Remember to investigate all of your options before making any big financial decisions.
It will almost always help to meet with a financial advisor as you figure out your ideal options for getting school aid. For many students, this will actually include a combination of federal and private loans.
Student Loans: Private vs. Federal
Private student loans are pretty much like most other debt, but the federal version is very different from the norm.
The basic strategy for repaying most debt, like mortgages, credit cards, or auto loans, is pretty straightforward:
- Get a low interest rate
- Pay back the money ASAP
Lower interest rates save you money. If you were to pay back a $50,000 loan over a period of 10 years with 7% interest, it would ultimately end up costing you $69,665. That’s nearly $20k extra, and it’s due solely to the interest rate. But let’s say you wanted to pay back a $50k loan at 2% interest instead – if you paid it back over ten years, that would only amount to about $5k extra
If you want that low interest rate, lenders have to see you as an appealing borrower. In the case of private debt, interest rates and the terms of repayment are often based on your credit and various market factors. Private student loans will need to be paid off completely, and there’s virtually no room for flexibility if the borrower is struggling financially.
To lay it out, here’s a quick summary of the differences between federal loans and their private cousins:
Federal Student Loans:
- Flexible payment plans
- You may qualify for loan forgiveness
- Undergrad loans have a maximum value
- Interest tends to be higher
Private Student Loans:
- Payments are based on the total owed
- Must be paid back in full
- Loan maximum depends on your credit
- Interest might be lower
Repaying Federal Student Loans
Federal loans play by their own rules. They include repayment options based on the debt total, but they can offer income-based plans too.
In the case of the latter, payments won’t really be impacted by the debt owed (except for the amount that can be forgiven). Here, savings come from keeping payments as low as possible while maximizing forgiveness.
As you might expect, a higher income means higher payments, while a lower income means you’ll pay less – that’s kind of the whole point! It’s based on what you’re able to afford. So if two people owe identical debts, yet one person makes significantly more money than the other, then the person who makes more will also pay more on an income-driven plan.
At the same time, if two people owe different amounts but have similar incomes, they’ll make similar payments. Of course, enjoying lower student loan payments is not a reason to make less money on purpose. Financially speaking, it’s better to make more money with higher payments because you get a better shot at building up a savings account.
If your income suddenly drops, you can adjust your income-driven plan. If you are earning money but other financial concerns take priority, student loan payments can be placed in deferment or forbearance for as long as a three-year period.