HELP! What are the differences between federal & private loans?

Forward: We're all about bringing you the best offers in student discounts... but we want to be more than just the place you go to save a buck. We want to help you make more informed financial decisions in the future. That's why we're teaming up with finance & loan experts CommonBond to help you decipher the (sometimes) scary world of finance and what it means for YOU as a college student.

Forever A Loan

When it comes time to pay for college, many students (and their families) turn to student loans to help them cover the growing costs. While it’s true that taking out a loan is a major financial decision, there’s nothing to fear—it’s a normal part of paying for college and can offer you the opportunity to broaden your school selection.

That said, there are many different student loans and lenders (including CommonBond), and the only way to make the decision that’s right for you is to get informed. With that in mind, here’s an explanation from CommonBond of the two main categories of student loans, federal and private: what they entail and how to know which one (or ones) you should take out.

You’re welcome.

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Federal Loans

Federal student loans are dispersed by the U.S. government and given to students based on their responses on the Free Application for Federal Student Aid. The different types of undergraduate federal loans are:

*Direct or “Stafford” Loans, in which the government loans money to incoming students for their school tenures. These are available in both subsidized and unsubsidized versions; the subsidized versions are designed for students who demonstrate financial need and offer more borrower protections. *Parent PLUS Loans, which are available to parents of undergraduate students, provided they meet eligibility requirements.

There are key differences between Direct Loans and Parent PLUS Loans that go beyond who signs on the dotted line. Direct Loans, which are the most popular type of federal loans, come with limits—dependent undergraduate students can only take out $5,500 their first year, and a total of $31,000 in Direct Loans over the course of their college careers. Parents who take out PLUS Loans, though, can borrow the total cost of attendance, minus any other financial aid they’re receiving.

Of course, these different loans have different terms. Direct Loans offer lower interest rates than PLUS Loans, and more protections as well—for instance, students who take out Direct Loans don’t have to start paying them back until six months after graduation, and students who work in certain public service sectors for 10 years are eligible to have their balances forgiven. Parents with PLUS loans have to start paying them back upon disbursement and are only eligible to have their loans canceled under extreme circumstances.

Both types of loans offer deferment and forbearance protections, which allow borrowers to pause or reduce monthly payments based on certain criteria. This usually happens in the event of a job loss or another unexpected financial difficulty.

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Private Loans

Private student loans are serviced by banks or other independent organizations (like CommonBond, which means that, apart from restrictions imposed by federal law, there is no overall set of guidelines for them. Things like interest rates and hardship protections are up to the judgment of the individual lender, with some offering terms that are preferable to those offered by the government, and others lagging behind.

One thing that most private lenders have in common is that they require a cosigner in order for an incoming college student to take out a loan. As most young adults have very little credit history, if any, private lenders request that their parents or guardians sign as guarantors, promising to pay their monthly charges if the students can’t.

Another major difference between private lenders and the U.S. government is that many private lenders offer variable-rate loans in addition to fixed-rate loans. While the interest rates offered by the government remain the same over the term of repayment, variable interest rates change as the federal interest rate changes. Usually, variable-rate loans start off with lower interest rates than fixed-rate loans, but they can rise or fall as the years pass.

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Which Is Right for Me?

Now that you know the difference between federal loans and private loans, you can make an informed decision about which are better for you. If you’re planning to work in the public sector and thus be eligible for Public Service Loan Forgiveness, federal loans might be preferable for you. If you can find a cosigner and your top priorities are a lower interest rate or a good customer service experience, private loans are a better choice.

For many students, though, the answer to the “Which should I choose?” question is both. Direct Loans offer terms that are preferable to some, but they have relatively low caps—students who go to private colleges often max out their federal loans first, then turn to private lenders in order to subsidize the rest of their school costs.

Whichever decision you make, it’s important that you do your homework first—both in terms of how different loans function and your own personal situation. Once you have, you’ll be able to make the choice that best suits you.

For more info, check out CommonBond.

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