by Mara Strom
Some of you may be wondering whether qualifying for a federal loan is really that big of a deal. You figure money is money, and debt is debt. Plus, you’ve heard that applying for and getting accepted for a private loan is easier and faster.
While it’s true that any green will pay the bills, not all loans are equally emerald. Here’s a look at the major differences between federal and private student loans.
Federal Student Loans
Backed by the U.S. government, federal student loans are available through your school (Perkins loans) or through lenders and banks (Stafford and PLUS loans). To qualify for a Federal Student Loan, you must complete a FAFSA, the Free Application for Federal Student Aid. Benefits of federal loans include:
• Lower, fixed interest rates
• Multiple repayment options with longer loan terms
• Less stringent credit requirements than for private loans
There are three kinds of federal student loans: Perkins Loans (for students with extreme financial aid), PLUS Parent Loans (for parents of undergraduate and graduate students) and Stafford Loans (for undergraduate and graduate students).
When federal student aid is insufficient to cover the cost of college, many students turn to private loans. Despite the “credit crunch”, the market for private loans has grown rapidly in recent years, helping to fill the gap between federal aid and skyrocketing college costs. While private loans are widely available, it’s wise to weigh your options carefully before signing up for one.
• You can borrow up to the total cost of your education
• You don’t have to complete a FAFSA
• Funds may be use for any education-related expense
• Up to 1% reduction on interest rate for loans pay directly to your school
• Subject to credit check
• Lower credit score will raise your interest rate on the loan
• Higher interest rate (relative to Federal loans)
• Interest rate is variable and may increase over the life of your loan
• Less amenable terms, may not allow for deferment while in school or for subsequent graduate study
In short: Private student loans undoubtedly fill a real and growing need for many students. The terms and interest rates on private loans, however, make them a less attractive option than Federal student loans. Therefore, be sure to complete your FAFSA on time so that you can qualify for Federal assistance. Only once you’ve exhausted your financial aid award from Uncle Sam should you consider a private student loan.