A student loan can be any kind of borrowed money that’s used to pay for education. Although the name might imply that the loans are only provided to students themselves, parents may also take out loans to help pay for their kids’ education.
There are two main types of student loans: federal loans and private loans. Federal loans are made by the federal government and come in a few varieties:
In contrast, private loans are generally made by private financial services companies, such as banks, credit unions, and Sallie Mae. Terms of private loans depend on the lender.
When deciding how to finance your education, there are some key distinctions you should know about federal and private loans.
|Federal loans||Private loans|
|Who qualifies?||Anyone, but the type of loan generally depends on the family’s financial neediness||Those with a good enough credit score (or who have a cosigner with good credit)|
|When do you have to start making payments?||Usually not until after graduation (unless it’s a parent loan)||Often while you’re still in school|
|How high is the interest rate?||Usually lower||Usually higher|
|What if I can’t pay?||You may be able to take a temporary break from payments or opt into a new payment plan||Your lender may cut you a temporary break, but it’s not guaranteed|
|Could I get the loan forgiven?||Maybe, if you work in a public service career||Depends on your loan terms but less likely|
Not only are private loans typically more expensive than federal loans, they’re also usually less forgiving if you have trouble meeting payments later in life. Plus, many private loans charge a fee if you want to make additional payments or pay off your loan early. Federal loans don’t charge prepayment fees.
Depending on the lender or type of loan, you may need to show:
When it comes to federal loans and some other types of aid, you’ll fill out the FAFSA (Free Application for Federal Student Aid) each school year to find out what types of loans you may qualify for.
Many families can’t fully cover the cost of college or grad school with savings, income, grants, and scholarships alone. Student loans help to fill that gap. The federal government sponsors a number of types of loans, while private lenders, such as banks and credit unions, also offer student loans. Federal loans are often considered a safer bet than private loans due to their typically lower interest rates and stronger protections when it comes to repaying.