Private vs Federal Student Loans

May 10, 2019 · 7 minute read

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Private vs Federal Student Loans

Getting accepted to college may seem exciting on the surface, but in reality, it’s only half the battle. After you’ve filled out your applications and decided on a school, you’ll then need to fund your college education (which can quickly dampen the excitement of getting accepted).

There are a few different options when it comes to financing a college education, and it’s important to understand the pros and cons of each. Then, you’ll likely be better able to develop a funding strategy that fits your unique situation.

Depending on your academic qualifications, you may have been awarded scholarships or grants, which is funding that won’t (typically) need to be repaid. Any expenses not covered by a scholarship will need to be financed, often through a combination of work-study, personal funds, or student loans.

It is fairly common for college students to take out student loans to finance their education. There are two main types of student loans—private student loans and federal ones. We’ll compare and contrast some of the more popular features of both private and federal student loans and explore some features that can help you determine what makes the most sense for your financial situation.

Federal Student Loans

Federal student loans are funded by the federal government and, in order to qualify, you must fill out the Free Application for Federal Student Aid (FAFSA®) every year that you want to receive federal student loans. We’ll delve more into FAFSA soon—but first, here are some important distinctions to consider.

Subsidized vs Unsubsidized Loans

Federal loans can be subsidized or unsubsidized. If you’re an undergraduate student and you have a certain level of financial need, you may qualify for a subsidized loan. The amount of money you qualify for will be determined by your school . They’ll also determine how much money you should receive in subsidized loans, if any.

If you are granted a subsidized loan, the U.S. government will cover, or subsidize, the cost of accrued interest on the loan while you are a full- or half-time student. Your interest payments are also covered with subsidized loans during the six-month grace period after graduation as well as during any periods of loan deferment.

If you receive unsubsidized federal loans, you will not need to demonstrate financial need when applying and, as with subsidized loans, your school will determine the amount you can receive, based on what it will cost you to attend. But with unsubsidized loans, you are responsible for the principal amount of the loan as well as any interest that accrues throughout the life of the loan.

Direct PLUS Loans for Parents and Graduate Students

Direct PLUS Loans are another source of federal student loan funding. To qualify for graduate PLUS Loans, you need to be a graduate-level or professional student in a program that offers graduate or professional degrees or certifications and be attending college at least half-time.

Related: The Differences in Direct vs. Indirect Student Loans

Or, you can also apply for a parent PLUS loan if you’re the parent of a dependent undergraduate student attending an eligible school at least half-time. “Parent” can be defined as biological or adoptive—or, under certain circumstances, you can be a step-parent.

To obtain a Direct PLUS loan, you cannot have an adverse credit history. Plus, you (and, if applicable, your dependent child) must meet the general eligibility requirements for federal student aid.

More About FAFSA

If you plan to apply for any of these types of federal loans, you’ll need to fill out a FAFSA form . Be aware of your state’s deadline —FAFSA funding is determined on a rolling basis, so the sooner you can apply, the sooner you may qualify.

Benefits of Federal Student Loans

First off, you won’t be responsible for making student loan payments while you are actively enrolled in school. Your repayment will typically begin after you graduate, leave school, or are enrolled less than half-time. Interest rates on federal student loans made after July 1, 2006 are fixed and are typically lower than interest rates on private student loans.

And depending on the type of federal loans you have, the interest you pay could be tax deductible . Aside from Direct PLUS Loans, your credit history is not a factor in your federal loan application. When it comes to federal student loan repayment, there are several options to choose from, including some income-based repayment plans.

And if you run into difficulty repaying your federal student loans after graduation, there are deferment and forbearance options available. Contact your student loan servicer for more information on these programs.

Private Student Loans

Private student loans are not funded by the government. To apply for them, you can check with individual lenders (banks, credit unions and the like), with the college or university you’ll be attending, or state loan agencies.

Because these loans are available from multiple sources, and each will come with its own terms and conditions. So, when applying for private student loans, it’s important to clearly understand repayment terms before signing as well as the differences between private vs federal student loans.

Since private student loans are not associated with the federal government, their repayment terms and benefits vary from lender to lender. Some private loans require payments while you’re still attending college. Unlike federal loans, interest rates could be fixed or variable. If you are applying for a variable-rate loan, it’s a good idea to check to see how often the interest rate can change, plus how much it can change each time, and what the maximum interest rate can be.

When applying for a private loan, the lender typically reviews your financial history and credit score, and you may be required to have a cosigner. Also, be sure to ask your lender about repayment options in addition to any deferment or forbearance options.

These will all vary by lender, so it’s important to understand the terms of the particular loan you are applying for.

Private loans can help fill the monetary gap between what you’re able to cover with grants, scholarships, federal loans, and the like, and what you owe to attend college. It’s never a bad idea to take the time to do your research, shop around, and find the best loan options for your personal financial situation.

Student Loan Consolidation Versus Refinancing

After graduation, depending on your student loan situation, you may want to consider consolidation or refinancing options to combine your various loans into a single one. The federal government offers a Direct Consolidation Loan program that allows you to combine your federal loans into one.

In this program, the new interest rate is the weighted average of the interest rates of all your loans being consolidated—rounded up to the nearest one-eighth of a percent. This means that the actual interest rate isn’t necessarily reduced. If your monthly payments are reduced, it is most likely because the repayment term has been lengthened.

As far as private loan consolidation, what a private lender is really doing is actually refinancing your loans into one new loan. Depending upon your financial situation, you could qualify for a lower interest rate when you refinance.

But what if you have both federal and private loans? If you combine your federal loans through the Direct Consolidation Loan program and refinanced your private loans, you’d still have two payments. SoFi, though, can refinance federal and private student loans together to give you one convenient payment. Benefits of federal student loans don’t transfer to loans refinanced by private lenders, though, so keep that in mind.

Refinancing Student Loans at SoFi

If you qualify to refinance student loans at SoFi, there are no origination fees and no prepayment penalties. You can choose between a fixed or variable rate loan. And if you unexpectedly lose your job, you could qualify for SoFi’s unemployment protection, which allows you to suspend your monthly payments for up to 12 months.

To see what refinancing your loans could do for you, take a look at SoFi’s student loan refinance calculator.

Learn more about whether student loan refinancing with SoFi could be the right financial solution for you.


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SoFi Student Loan Refinance
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

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