Private and Federal College Loans Compared

There are federal college loans and private college loans that are available to students and parents who are looking to fund college education. These loan programs are design to provide primary or secondary funding and give the student and parent an opportunity to meet any unfunded need to pay all of the anticipated college education expenses.

College loan programs differ between federal and private sources. These programs have different requirements and require that the parent or student demonstrate creditworthiness or the ability to repay the loan when due. They also have different repayment schedules, which may occur immediately or within a period of time after the student graduates from college.

Federal Student Loan Programs

Federal student loan programs include the Stafford and PLUS loan programs. To apply for either program, a student and their parents must complete the Federal Application for Federal Student Aid (FAFSA) form. This form provides the federal government with information necessary to determine whether the student qualifies for aid, based on family income and the expected amount that the family will contribute. Upon completion of the FAFSA, a financial aid grant will be made to the student.

Stafford Loans

The Stafford loan is available to students. It allows students to borrow an amount to fund college, up to a limit. This limit is determined by the student’s year in school. The amount that is provided in years 1 and 2 is 1/2 the amount available for year 4, while the amount in year 3 is 3/4ths the year 4 amount. The Stafford loan has a capped interest rate and is based on need. The loan does not need to be repaid until 6 months after the student leaves school or graduates.

PLUS Loans

The PLUS loan is available to students and parents. The PLUS loan provides higher loan limits that the Stafford loan, but is subject to credit qualifications or a co-signer. The PLUS loan has a higher interest rate than the Stafford loan and is guaranteed by the federal government to lenders that make these loans available. Repayment of a PLUS loan takes place within 60 days after the funds have been disbursed by the U.S. Department of Education to the student’s institution.

Private Student Loans

Parents who do not qualify for any of the federal student loan programs based on income or credit, can apply for private student loan programs. Banks, credit unions and other lenders who specialize in the student loan market offer these programs. They offer varying degrees of interest rates which are determined by underlying loan interest rates, These programs are available to people with both good and bad credit and do not have a set limit on the amount that can be borrowed or specific guidelines on how the money can be used. Repayment of private loans takes place immediately, although a few programs may allow deferred or reduced payments during the time that the student attends a college or university.

The type of student loan program that is best suited for your needs to fund college is based on your situation. Federal programs offer some flexibility with respect to repayment but are subject to caps and other limitations. Private loans may be the answer for certain borrowers but do not carry the guarantees that federal student loan programs have and will have higher interest rates attached to the amount borrowed.


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