Federal vs. private student loans

With unemployment rates lingering around 10 percent, many are thinking about going back to school. Whether you're a first-time student or simply looking to further your education, you may need a student loan to fund your studies. Universities are increasing their tuition and fees and show no sign of slowing. Now that the Department of Education has bought Stafford, Parent PLUS and Grad PLUS loans, you might be pondering the differences and benefits of federal and private loans.

Federal student loans

Federal loans carry a variety of benefits for those borrowing. The Ensuring Continued Access to Student Loans Act of 2008 gave federal loans a bit of an increase, allowing students to borrow more money. Stafford and PLUS loans, now backed by the U.S. Treasury, are in a safer position for lenders and those borrowing. Federal loans also have the benefit of lower interest rates than private banks.

Unfortunately, federal student loans can be hard to obtain for students with bad credit history. In this case you may need a co-signer on the loan.

If you're looking to go back to school, first make sure to fill out your FAFSA, or Free Application for Federal Student Aid. Then apply for available grants and campus-based aid. After you receive your federal and campus aid, you'll know how much you need for your Stafford and PLUS loans.

Private student loans

If you've maxed out your federal student loan options and need to cover the gap, you may want to consider a loan from a private institution. While the credit crisis has caused many large private lenders to back out of student loans, there are still some institutions staying in the game. Local community banks and credit unions are more willing to provide private student loans if you're already in good standing with them. Smaller banking institutions may also have lower interest rates than larger banks.

In order to receive a private student loan, you'll need a solid credit history, a co-signer or both. Bank loans carry a higher interest rate than federal loans. You should exhaust all your federal aid options and then move to the private sector if you still need more.

You can calculate your possible monthly payments with Bankrate's loan calculator.

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