What’s the difference between federal and private student loans? What are the different types of federal and private student loans? And how can you apply for the loan type you choose?
Federal student loans are loans administered by the federal government, specifically, The U.S. Department of Education’s office of Federal Student Aid. If you apply for financial aid by completing the FAFSA, the student loans administered to you are federal.
There are several types of federal student loans:
Direct Subsidized Loans are loans for undergraduate students who demonstrate financial need to help pay for college or career school. The U.S. Department of Education pays the interest on Direct Subsidized Loans while you’re in school at least part-time, for the first six months after you leave school, and during deferment (postponement of loan payments).
Direct Unsubsidized Loans are loans for undergraduate, graduate, and professional students but are not based on financial need. Borrowers with this loan type are responsible for paying all of the interest that accrues.
Direct PLUS Loans are loans for graduate and professional students (Grad PLUS), as well as parents of dependent undergraduate students to help pay for school expenses not covered by financial aid (Parent PLUS). A credit check is required to receive Direct PLUS Loans.
Direct Consolidation Loans allow borrowers to combine all of their eligible federal student loans into one loan with a single loan servicer. The benefits of consolidation and how to apply can be found on our blog here.
To apply for a federal student loan, you must first complete and submit the FAFSA, the Free Application for Federal Student Aid form. Based on your financial need, your school will send you a financial aid offer, which may include federal student loans. Your school will tell you how to accept all or a part of the loan(s).
Private student loans are loans available to all students (or parents) regardless of undergraduate or graduate status. A bank, credit union, state agency, or a school can disburse private student loans. It is important to note, private student loans should be considered after a borrower has explored scholarship, grant, and federal student loan options.
Generally, there are two types of private student loans:
School-Channel Loans are loans “certified” by the school for which the borrower is attending. The school signs off on the borrowing amount, and the funds are disbursed directly to the school. The funds are held by the school and are used as needed, meaning the borrower does not have access to the money, but is responsible for paying the loan back. This type of private student loan offers lower interest rates, but generally takes longer to process.
Direct-To-Consumer Loans are loans that are not certified by the school the borrower is attending. The school does not hold the loan nor disburse any funds for education expenses. A borrower simply supplies enrollment verification to the lender they are borrowing from, and the loan proceeds are disbursed directly to the borrower. This type of private student loan usually comes with a higher interest rate.
Once you know exactly how much you need to borrow, you can submit an application for a private student loan directly from the lender’s website. However, be very careful of which lender you borrow from! Check with your school first to see if they have a preferred lender list. Shop around and compare interest rates, payment terms, and fees to find the most cost-effective private student loan for you.
Whether you choose federal or private student loans to help pay for your schooling, you must pay back the money you borrow, regardless if you graduate or not! Taking out a loan is a legal agreement between you and the loan lender so make sure you understand what you are signing and agreeing to. Make sure you know and understand the interest rates, how to repay the loan(s), and when you should begin to repay. If something isn’t clear, ask for help!