The pros and cons of private student loans vs. federal student loans


Opting for a loan to meet the financial demands for better education is mandatory for most students, but it can be tricky. Student loans are broadly classified into two types: federal loans and private loans.

Federal loans are the loans provided by the federal agencies to pay for college fees etc. The federal loan is a regulated and governed by the Federal Department of Education. At present, five types of federal loans are available to students. Students/Parents need to meet certain conditions and special scholarship grants before applying for Federal loans.

Private loans, on the other hand, can be easily acquired by students who cannot get federal loans. Private loans are provided by private lenders and other financial institutions to students for their entire education fees, including costs of books, housing, transportation, etc.

The pros of federal loans

  • Low income eligibility. Federal loans are more useful for students and their parents. who show little to no income.  The requirements and the amount of money to be given are evaluated by the college itself, based on the student’s background and academic record.
  • Flexible repayment mode. No requirement of financial need for borrowing and extension of repayment date even after graduation.
  • Loan forgiveness policy. On some types of Federal students loans allow partial or complete loan forgiveness if certain standards are met. Though this is not easy.
  • Potential to get subsidized Loans. Eligible candidates are not charged any interest till the repayment date and a grace period of six months is also allowed.

The cons of Federal Loans

  • Background restrictions. Can only be acquired by U.S. Citizens or permanent residents. College funds restrict the amount that can be loaned, and they are only given to students with an excellent academic background.
  • Usage of funds. Federal loans can have limitations on how it could be used and require a separate application for a loan each academic year.

The pros of private loans

  • Private loans are easy to acquire. Easier eligibility criteria and higher amounts can be borrowed.
  • Simpler application. Formal complexities are minimal; can be applied for online or by phone, so no meetings are required. FAFSA forms are not required in most cases and, if any, the charges are very much less.
  • Interest is tax-deductible. And there is no prepayment fine.
  • Quick funding. Once approved, funds are given immediately, and several cosigner options are available.

The cons of private loans

The downsides can be listed as follows:

  • Credit check requirement. The lower the score the higher the cost.
  • High-interest rate. Usually higher for private loans.

The bottom line is that, private loans have functionality and availability, while federal loans are a big harder but more flexible. A loan for an individual’s education is an investment, so speaking with several agents from a variety of lenders will give you a more informed decision on which route to take.