What's the Difference Between Federal Student Loans and Private Student Loans?

By Debbie Dragon   

After you've exhausted your research for free funding, scholarships and college work-study programs, and if you still need assistance paying for your college education, your next option is usually student loans. There are a number of loan programs available to college students, but you'll want to focus first on federal student loans because of the advantages they offer borrowers over private student loans.

Federal student loans are the largest source of student loans. They offer the most attractive financing terms when compared to other loan options, including lower interest rates and longer repayment terms. They were created with the needs of students in mind, and they make it possible for families at all income levels to send their children to college. Federal loans are offered through Sallie Mae (a.k.a. the Student Loan Marketing Association or SLMA) and are guaranteed by taxpayers. They come with borrower protections in case of unemployment, death, disability or economic hardship. All federal student loans require that you complete the Application for Federal Student Aid (FAFSA). 

Federal student loan programs offer:

• Lower interest rates, compared to private loan options
• The potential to postpone payments in certain situations
• Easier approval requirements, compared to private loan options
• Federally-subsidized interest rates, in most cases
• Longer repayment terms than most private loan options offer
• Loan payments that can be deferred until after you graduate or leave school

Private student loans are available from schools, banking institutions and educational lending organizations whose sole purpose is to lend to college students. The interest rates and repayment terms vary from one lender to another and are based on the borrower's personal credit history. A private student loan is nothing more than an unsecured personal loan that you intend to use for educational purposes; that's why it's much harder to qualify for private loans than for federally funded student loans. Most students applying for private student loans will require a co-signer with a strong credit history.

Additionally, the media has previously reported that Sallie Mae partnered with several giant, publicly traded, for-profit higher education companies in an effort to push high-cost private loans to high-risk borrowers. Some of the interest rates on these loans exceeded 20% and were given to students with bad credit and families who were at high risk of default.

Private student loan programs typically offer:

• Interest rates and loan fees that vary greatly from one lender to the next and are based on your credit score
• Stricter qualifications compared to federal loans, often requiring a co-signer
• No deferral or forbearance options of loan payments
• Slightly lower interest rates if you repay them using automatic bank drafts
• No options except to begin loan payments immediately, even while you're still a student

Regardless of what type of loan you get, you'll be responsible for repaying them, even if you don't graduate from college; are disappointed with the quality of the education you received; didn't make as much money as you hoped after graduating; or are unable to find a job after graduating. Even if you declare bankruptcy after graduating from college, your federal and private student loans cannot be discharged, so it's important to use all of your non-loan funding options before turning to student loan programs.

Because of the borrower protections, lower interest rates and easier approval requirements, most students will find federally funded student loans to be the better option.