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Private vs Federal Student Loans

April 17, 2020 · 7 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

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 distinct
ions 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, parents can also apply for a parent PLUS loan if they’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 (you can learn more about that here ). Plus, you (and, if applicable, your dependent child) must meet the general eligibility requirements for federal student aid.

More About the FAFSA

If you plan to apply for any of these types of federal loans, you’ll need to fill out the 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,credit history doesn’t factor into a federal loan application. When it comes to federal student loan repayment, there are several options to choose from, including several income-driven repayment plans.

And if you run into difficulty repaying your federal student loans after graduation or when you drop below half-time enrollment, there are deferment and forbearance options available. These programs allow qualifying borrowers to temporarily pause payments on their loans should they run into financial issues—but interest may still accrue. The loan type will inform whether a borrower qualifies for deferment or forbearance.

Borrowers can contact their student loan servicer for more information on these programs.

Qualifying borrowers can also enroll in certain forgiveness programs, such as Public Service Loan Forgiveness (PSLF). These programs have strict requirements, so borrowers who are pursuing forgiveness should review program details closely.

The CARES Act and Federal Student Loans

The CARES Act , passed in March 2020 in response to COVID-19, includes provisions to help borrowers with federal student loan repayment. The bill temporarily pauses payments on most federal student loans, without interest, through the end of September 2020.

Additionally, the CARES Act suspends involuntary collections and negative credit reporting during the same time period.

While required payments are paused, borrowers are still able to make payments on their loans if they so choose. 100% of payments made during this time will be applied to the principal balance of the loan.

Borrowers enrolled in forgiveness programs will not be impacted by the nonpayment of their loans during this time. The Education Department will consider this time period as if the borrower had continued making payments.

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 annual percentage rates (APRs) and 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, which means it may be beneficial to have a cosigner.

Again, 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.

Determining Whether a Student Loan is Federal or Private

To find out if the student loan you have is a federal student loan, one option is to check the National Student Loan Data System (NSLDS). This database, run by the Department of Education, is a collection of information on student loans, aggregating data from information about student loans, aggregating data from universities, federal loan programs, and more.

Borrowers with federal student loans can also log into My Federal Student Aid to find information about their student loan including the federal loan servicer.

Private student loans are administered by private companies. To confirm information on a private student loan, one option is to look at your loan statements and contact your loan servicer.

Options for After Graduation: Consolidation vs Refinancing

After graduation, depending on one’s student loan situation, borrowers may wish to consider consolidation or refinancing options to combine their various loans into a single loan.

What is Student Loan Consolidation?

The federal government offers the Direct Consolidation Loan program that allows borrowers to combine all of their federal loans into one consolidated loan.

Loans consolidated in this program receive a new interest rate that is the weighted average of the interest rates of all loans being consolidated—rounded up to the nearest one-eighth of a percent. This means that the actual interest rate isn’t necessarily reduced when consolidated. If monthly payments are reduced, it is most likely because the repayment term has been lengthened. Additionally, only federal student loans are eligible for consolidation in the Direct Consolidation Loan program.

What is Student Loan Refinancing?

Borrowers with private student loans might consider refinancing their loans. Essentially, refinancing is taking out a new loan. Depending upon individual financial situations, applicants could qualify for a lower interest rate through refinancing.

When an individual applies to refinance with a private lender, there is typically a credit check of some kind. Each lender reviews specific borrower criteria, which varies from lender to lender, which influences the rate and terms an applicant may qualify for.

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. It’s important to note, however, that the benefits and protections offered with federal student loans don’t transfer when loans are refinanced by private lenders, so keep that in mind.

Refinancing Student Loans at SoFi

Refinancing won’t be the right choice for everyone. Again, refinancing federal loans eliminates them from the federal benefits and borrower protections—including the current CARES Act protections. Consulting with a financial professional could be helpful as you determine which repayment strategy fits best with your financial goals.

Those who are still interested in refinancing, could consider SoFi, where there are no origination fees and no prepayment penalties. You can choose between a fixed or variable rate loan. And borrowers who unexpectedly lose their job could qualify for SoFi’s unemployment protection program, which allows the suspension of monthly payments for up to 12 months.

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

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


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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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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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