College is expensive, but for many it is part of their American dream. Not only are good grades and decent SAT scores needed to matriculate, money is needed to help finance the process. Aside from scrimping, scraping, financial aid and scholarship money guardians and students can help finance the rest of the expenses with either federal loans or private loans.
Federal loans are low, fixed-rate loans backed by the Federal Government. There are several options available. PLUS loans where parents manage the debt; the Stafford Loan that is the mostly widely used loan in the federal portfolio; and Perkins Loans for extremely low-income students. Except for the latter, the major qualification for the first two loans is a good credit history. The money is loaned either directly from the government or through one of their approved lenders such as Sallie Mae. Private loans are offered directly from lenders to borrowers through private institutions.
Some of the major differences between the two (using Stafford Loans managed by Sallie Mae and general private loan information) are:
- Both require a decent credit history, however private lenders have stricter criteria
- Federal Loan applicants Free Application for Federal Student Aid (FAFSA) while the loan applications of the private lenders must be completed
- Federal loans are only offered to US Citizens or permanent residents
- Federal loans are granted to those full- or half-time undergraduate or graduate student while personal loans are granted for students enrolled at least half-time at a 4- or 5-year college or university (approved by the U.S Education Dept)
- The interest rates for Federal Loans are set by a federal formula, private loan rates are set by the lender
- Federal loans have a 3% origination plus a 1% Guarantee fee (for 4%), private loans have a repayment fee (3%) may apply to some credit tiers
- The loan amounts are significantly lower for Federal Loans as they are capped by Congress, but private loans can be granted in the amount of $100,000
- Federal loans have a standard 10 year repayment schedule while private loans have a 15 year schedule
When comparing the two options, make sure to get printed lender information for both, so all the differences can be compared side by side.