Student Loans

Private vs. federal student loans

The two main types of student loans are private and federal loans. While both serve the same function, there are some significant differences students should keep in mind.

• Eligibility: Federal student loans are generally available to any U.S. citizen or permanent resident who needs them. Only Direct PLUS Loans, which are available to parents, graduate students and professional students, require a credit check. Even then, there’s no minimum credit score requirement you need to meet. In contrast, private student loan companies require a credit check, which may make it challenging for most students to qualify. On the other hand, some private lenders offer loans to international students.
• Interest rates: Private lenders offer a range of interest rates, which can be fixed or variable. If you apply and get approved, your interest rate will depend on your credit history, income, other debts and more. Federal student loan interest rates, on the other hand, are standardized, which means that for each type of loan, every borrower receives the same rate. The federal government sets federal loan rates once a year, and those rates are always fixed. 
• Loan limits: Both the federal government and private student loan lenders have caps on how much you can borrow. However, these limits can vary by lender and loan type, so it’s important to double-check before you apply to make sure you can get what you need.
• Features: Federal student loan borrowers get access to several benefits that can help with their repayment plan. These features include loan forgiveness programs, income-driven repayment plans and forbearance and deferment options. Private lenders may offer forbearance and deferment, but the terms may not be as generous. Also, most private lenders don’t provide income-driven repayment plans, and none of them offer loan forgiveness.
• Repayment plans: Private student loan repayment plans can vary depending on which lender you choose. They’ll typically offer the chance to defer your payments until you’re done with school, but you may also have the chance to start making full payments when the loan is disbursed or make interest-only payments until you leave school. Repayment terms can range from five to 25 years. With federal loans, the standard repayment plan is 10 years. However, you have the option to extend your term to up to 30 years.

What to know about student loan interest rates

Student loan interest rates represent the cost of borrowing money to pay for school. They’re calculated as a percentage, which is applied to the principal amount of your loan. As a result, the amount of interest you pay with each payment will go down over time as you pay more of your actual loan amount.

Student loan interest rates come in two forms: fixed and variable. A fixed interest rate will remain the same for the life of your loan, which provides some certainty. With variable interest rates, your rate can change over time, depending on the current market interest rates.  

Variable rates tend to start lower than fixed rates; however, because you take on the risk of interest rates rising in the future, they’re generally best if you plan to pay off your loans quickly. 

As you consider whether to borrow money to pay for college, calculate your student loan interest to get an idea of how much you’ll end up paying. Depending on how much you borrow and what your repayment term looks like, it could amount to thousands or even tens of thousands of dollars.

How do I get a private student loan?

It’s relatively easy to get federal student loans. Simply fill out the Free Application for Federal Student Aid (FAFSA), and your school will use that information to determine how much money you need and provide federal loans as an option. With Direct PLUS Loans, you’ll undergo a credit check, but the government is only looking for some major negative items.

Getting private student loans, however, is trickier. Private lenders offer a variety of loan types, interest rates, repayment options and other features, so it’s a good idea to shop around and compare what’s available before you submit an application.

Also, private lenders have minimum credit score requirements, and they’ll run a credit check to determine whether you’re eligible based on their criteria. If you get approved, your credit history and other factors will also determine your loan’s interest rate.

If you can’t get approved for a private student loan on your own, you can improve your odds with a creditworthy co-signer. But even that’s no guarantee, and some parents may be hesitant to co-sign because the account will show up on their credit report, and they’ll be responsible for paying back the debt if you can’t. 

Refinancing student loans

After you leave school, you’ll have the option to refinance federal loans, private loans or both. This process involves consolidating one or more existing loans with a single loan through a private lender. 

Refinancing student loans can provide significant benefits, but the process also has its drawbacks for some borrowers. If you’re considering refinancing, most lenders will allow you to get prequalified before you apply, which can allow you to compare loan offers from multiple lenders and decide if it’s the right move for you.

Benefits of refinancing student loans

For starters, if you qualify, refinance rates can be lower than what you’re paying on your current loans, which can save you money and reduce your monthly payment. You’ll also get some flexibility with your monthly payments because you’ll have the option to choose a shorter or longer repayment term. 

Finally, if your parent co-signed a private student loan while you were in school, you can refinance into your own name and eliminate their obligations. Parents who take out student loans on behalf of their children can also refinance in the child’s name later on if everyone is on board.

Drawbacks of refinancing student loans

The primary drawback of student loan refinancing is that not everyone is eligible. You typically need good or excellent credit and a relatively high income to get approved and achieve a low interest rate. Also, if you’re refinancing federal loans, you’ll lose access to the benefits the government offers, including loan forgiveness programs, income-driven repayment plans and generous deferment and forbearance programs.