What are the differences between private and public student loans?
With the cost of a college education continuing to skyrocket, more students than ever depend on financial assistance to help cover their educational expenses. Financial aid is money that is available to students to help pay for attending a post-secondary institution in the United States. There are a variety of financial aid tools available to students, including grants, scholarships, need-based awards, work-study employment and student loans.
Types of student loans
Based on eligibility requirements and some limitations on the federal financial aid products, many students compliment their award package with a subsidized or unsubsidized federal student loan, both of which are offered through the U.S. Government.
Private student loans are another method students use to pay for college. These are offered through lenders, such as banks, credit unions, and companies, such as Sallie Mae, as well as through schools.
Public vs. private loans
There are substantial differences between public and private student loans, as we’ll look at here, but both are designed to help students sufficiently fund their education. As a general rule, private education loans serve as a supplement to the federal loan option.
- Federal loans offer a fixed rate that is the same for every borrower. The interest rate for a private loan varies based on an index rate plus a margin, and the margin is based on the credit rating of the borrower.
- A subsidized federal student loan doesn’t need to be paid back until after the student graduates, and the government will pay the accrued interest up to 6 months after graduation. An unsubsidized federal student loan acts the same, but the student is responsible for paying the accrued interest. Private loans, however, have a variable interest rate, so students are encouraged to repay the interest while they’re still in school.
- All federal student loans come with terms that protect the borrower if they lose their job, go back to school or experience another economic hardship. If you don’t qualify for a deferment, federal loans have an additional check, called forbearance, which can place repayment on hold due to illness or by meeting other requirements.
- Private loans do not allow borrowers to put their payments on hold. However, if you experience a hardship, you can appeal to the lender for a deferment or forbearance.
- Federal loans offer seven repayment options, including standard repayment, which satisfies the debt in 10 years, and flexible pay-as-you-earn plans that allow you make payments based on how much you earn. Private loans typically provide two repayment options, standard and extended.
- If you are disabled, go into public service or teach in some low-income areas, all or a portion of your federal loans can be forgiven or discharged. However, federal student loans are generally not dischargeable in bankruptcy. Private student loans are usually not dischargeable in bankruptcy, and the federal programs that allow you to discharge the debt when you go into public service or social work do not apply to private student debt.