Comparing Federal and Private Loans
The Office of Student Financial Aid Services understands that paying for education can be challenging and confusing. We offer these tips to help families who need to borrow loans to cover the cost of education, and to find the best possible options.
Before applying for an alternative loan (private loan), we strongly recommend that you exhaust all of your federal loan eligibility. Did you know that almost all students will qualify for a Federal Direct Stafford Loan? To get this loan, complete the Free Application for Federal Student Aid ( FAFSA), a Master Promissory Note, and Entrance Counseling. Parents may qualify for a Federal Direct PLUS Loan by completing a PLUS application, FAFSA (the student’s FAFSA) and a Master Promissory Note. By filing the FAFSA, some students may also qualify for Federal (Title IV), State, and/or Institutional Grants.
Here are some reasons you should consider federal loans before applying for an alternative loan:
- Federal student loans have low fixed interest rates for the life of the loan. Rates don’t change based on volatile market conditions as they do for most alternative loans. You may think you have a good deal on your alternative loan now, but what would happen if the Prime or LIBOR rate on which the alternative loan is based increases significantly? Note that some alternative loans do offer fixed rate loans (though typically at higher rates).
- Federal Direct Stafford and Perkins loans are not based on your credit. You don’t have to be credit-worthy or have any established credit to qualify for federal student loans.
- Federal Direct Stafford and Perkins loans are both deferred while you are in-school. No payments are due for six months after you leave school (or enroll less than half time) in the case of Stafford loans, and nine months after you leave school (or enroll less than half time) in the case of Perkins loans. Also, if you qualify for Federal Direct Subsidized Stafford Loans or Perkins Loans, the government will pay the interest that accrues while you are in-school and during subsequent periods of deferment. This is not the case with alternative loans. If you qualify for a Federal Direct Unsubsidized Stafford Loan the interest will accrue while you are in school. You do have the option to pay the interest before your loan goes into repayment.
- After you graduate, federal loans have more flexible repayment options than alternative loans. Most alternative loans don’t offer more than one year of forbearance (temporary suspension of payments at the discretion of the lender). Federal loans offer a variety of deferment options (temporary suspension of payments if you meet certain requirements, such as unemployment or economic hardship), and up to five years of forbearance if you are having trouble making payments.
- In certain circumstances, your Federal Direct Stafford or Perkins Loan may be discharged (cancelled). This is not the case with most alternative loans, though some do offer cancellation in the event of the borrower’s death.
- By filing the FAFSA, you may qualify for other aid in addition to federal loans. You won’t know unless you file!
- The Federal Direct PLUS Loan for parents can be easier to obtain than an alternative loan. While a credit check is required, the US Department of Education does not consider your credit score. Rather, they are looking for the absence of adverse credit, such as bankruptcy, foreclosure, or default. If you qualify, you will receive the same interest rate (fixed at 6.84%) as all parent borrowers. If you don’t qualify, your dependent student will probably be eligible for an additional Federal Stafford Loan.
- More information on financing your education can be found in our Tips for Financing Your Education page.
- Read the Department of Education’s information on borrowing entitled Federal Versus Private Loans – Federal Student Aid.
- Access the Guide to Federal Student Aid for additional information on federal aid.
- Information on federal loans, including deferments, forbearance, and discharge (cancellation) options can be found on the Federal Student Aid website