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Federal Student Loans vs. Private Student Loans (Page 1 of 2)

Few students can afford to pay for college out of their savings, so they use student loans to pay for school. Two major categories of student loans include federal loans and private loans. Because we believe that it is important to understand your education-funding options, this article investigates the difference between federal and private student loans.

These days, there are very few students who can afford to pay for college without some form of education financing. Two-thirds of undergraduate students have some debt, while 88% of law students need to borrow to finance their education. A typical undergraduate may graduate with more than $20,000 of debt, while graduate students may have significantly higher indebtedness. Law school students may graduate with an average of $80,000 in student loans. Typically, students have acquired both federal and private debt, but what are the differences between these types of loans? And is one better than the other? Read on for an explanation of both categories of student loans.

Many students rely on federal student loans to help finance their education. The most common federal loan is a Stafford Loan. These may be issued directly from the government to the student, or they may be issued by a private lender, such as a bank or credit union, belonging to the Federal Family Education Loan Program (FFELP). Either way, these loans are guaranteed against default by the federal government.

Something else to remember about Stafford Loans is they may be subsidized or unsubsidized. If you are eligible for a subsidized Stafford Loan, the government will pay the interest while you are in school. Subsidized Stafford Loans are generally given to students who can demonstrate financial need. If you receive an unsubsidized Stafford Loan, you will be responsible for paying all of the interest, although you may have the payments deferred until after graduation. If you choose to defer paying the interest until after graduation, the interest will be capitalized, or added to the loan amount. To qualify for an unsubsidized Stafford Loan, you do not need to demonstrate financial need.

The amount of your Stafford Loan will vary depending on your year in school. However, graduate students may borrow up to $18,500 each year (with $8,500 being subsidized) with a combined limit for graduate and undergraduate federal loans of $65,500 for dependent students. If you are an independent student, the cumulative limit you may borrow is $138,500 for your graduate and undergraduate studies.

Stafford Loans have variable interest rates, based on the 91-day T-bill, and this interest rate is adjusted each year on July 1. Stafford Loans have an interest rate cap of 8.25%. All lenders offer the same base rate for Stafford loans because the interest rate is predetermined by the government, although many lenders offer payment incentives and/or discounts to help you reduce your interest rate further. Another benefit of federal loans is you may lock in a fixed interest rate if you choose to consolidate your federal student loans. That way, you will not be affected by adjustments in the interest rate each year.

Student loan (Page 1 of 2)

DEFINITION

A loan is a debt, which entails the repartition of financial assets over time, between the lender and the borrower. The borrower receives an amount of money from the lender, which should be paid back to the lender. The cost of the service depends on interest on the debt. Student loan is a loan offered to students to assist in payment of professional education. It doesn’t matter if you are graduate or undergraduate student. You can borrow money in all cases. Parents may also borrow to pay the cost of education for dependent undergraduate students. Maximum loan amounts depend on the student’s year in college. These loans usually carry lower interests than other loans and are usually offered by the government. Often they are supplemented by student grants which do not have to be repaid.

THE POINT

The cost of professional education rises every year that is why today, student loans are a fact of life. The key role belongs to the government as in any government sponsored program. While included in the term “financial aid” professional education loans differ from scholarships and grants in that they must be paid back. Student loans provide a variety of postponement options and extended repayment terms and do not require credit checks or collateral. The federal funds for education are limited and government and private lenders give the students flexibility in choosing the type of college that is right for them.

CATEGORIES OF STUDENT LOANS

There are different types of student loans that are available. They include:

Stafford Loans: Stafford Loans are issued by the federal government. They have a lower interest rate than other types of loans. There are either subsidized and/or unsubsidized Stafford Loans. When you take subsidized loan, the government pays your interest for you while you are studying. Subsidized loans are based on financial need. With unsubsidized loans, you will be charged interest while you are studying, but do not have to begin paying the loan until you graduate college. Unsubsidized loans are available without showing financial need. You must begin paying back these loans 6 months after you graduate.

Direct Student Loans (Perkins Loans): Perkins loans are given to students based on extreme financial need, and usually have very low interest rates. The interest rate is lower than a Stafford. Since the college already has been given its Perkins funds, it simply transfers the loan to your student account as a credit. You have to begin paying between 6 and 9 months after you graduate.

Subsidized Direct Loans: Direct loans are the same as a Stafford except that the federal government is the lender.

PLUS Loans: This is a parent loan, offered by the federal government that is unrelated to need. Generally, parents can borrow up to the total cost of education, minus any aid received. These loans are given regardless of your income, but lenders will consider your credit history. The interest is low on this type of loan and repayment usually begins within 60-90 days after full disbursement of the loan, or after the student graduates.