Difference between Federal and Private Student Loans
Difference between Federal and Private Student Loans – Interest, sanction and repayment being the factors.
INTEREST
Federal Student loans have a fixed rate of interest for all loans sanctioned after july 2006.This means that during the course of the repayment tenure,it stays the same.Of the Federal loans available,Stafford loans have an interest rate of 8.35% whereas Perkins loans have a interest rate of 5%,which is significantly much lower than private loans.Perkins loans have the lowest interest and are reserved for students of exceptionally lower financial means.Private Student loans do not have any maximum interest upper limit cap,and charge rates in the range of 12%-14%.This may differ on a case to case basis.Private loan companies review the credit history of all loan applicants before sanction,and set a flexible loan pattern for each customer according to their past credit.Flexible rate of interest is issued as interest rates fluctuate every quarter for intra bank/financial money transfer. Interest rates can increase for a borrower if his/her credit is not in good standing,or whose cosigner has bad credit in the past.Since both Federal and Private loans offer the student the chance to pay back loans after completing the college course,interest during this period will continue to accrue or accumulate.If on the other hand the student wishes to start making nominal payments whilst still at school,the rate of interest will be lowered by 1%-2%.not based on credit,fix ensure.during the duration of the ted meaning it wont change
SANCTION
Private loan sanction is primarily based on the credit history of the cosigner and borrower.There is no set cap on rate of interest and may vary even after consolidation.If the cosigner has bad credit history,interest be higher.Federal Student Loans have a limit of 27K for dependants and a 45K limit for independent borrowers.One important feature about private loans against Federal Student loans is that they are not backed by the Government against default,whereas Federal Student Loans is guaranteed and backed by the government.
Private Student Loans ask for more documentation like proof of income and do a deep thorough check of the borrowers credit history.As far as limitations are concerned,Federal Student Loans offer undergraduates anywhere between $5500 to $12500 per year for tuition nad upto $20K per year for graduates.
REPAYMENT
There are a strew of advantages when taking Federal Loans,as they are less rigid with their Terms and Conditions.There are more forgiving if you miss a monthly payment and Forbearance is issued easily in most cases if you sight hardship.For Private loans,firstly you have to prove your hardship,it is a subjective process and it depends on the basis of the financial hardship.They wont be too impressed if you tell them you just lost a job and are now in the process of getting a new job.Most Private lenders wont care and will probably grant forbearance for maybe just about 2-3 months,sort of like a “breather”,which honestly wont take the pain away,in fact the interest will accrue even more and your new monthly payments will rise so you better find a much higher paying job than your previous one monthly period so that reduce our installments,more forgiving,is a percentage of your income
Both Federal and Private lenders offer 6 month grace deferment period between end of the college course and till the student gets a new job,which should not be more than 6 months.
As far as “forgiveness” goes,there is almost no way a private lender is going to give that to you,it a rarity,but Federal Student Loans have programs wherein you join the military or peace corps or do social work for a certain amount of hours that in turn add upto clear the remainder of your debt.
BASIC DIFFERENCE
Important thing to remember is that Federal Student Loans are not credit based.There are three basic types of federal loans.Stafford that have a working interest rate of anywhere between 6.8 to 8.35%. They have a subsidised plan for low income families government whereby the principal amount is paid by the student and the interest is paid off by the government,in this plan its necessary for the student to show documentation proving they are in financial need.Under the non-subsidized plan,the student need not show financial need and will have to pay principal as .A simple way to apply for a federal loan is to apply directly to the department of Education or any institute that is affiliated to the FFELP.A FAFSA form would have to be filled out thereafter.For graduate studies,dependant student loan limit is $65500 and independent student loan limit is 138,500
Perkins loans with a rate of interest of 5% is the lowest and easiest loan to manage,therefore it is also the most sought after.Third type of Federal Student Loan for parents is the PLUS plan for families of low income which is also offered at low interest rates.
Private loans are by private financial institutions,that are credit based.Simply contact the bank directly for student loans plans and chose one that has the easiest payback schemes.Your credit history is checked by the Credit Unions before the loan is sanctioned.Interest RAtes are significantly higher,almost touching 15% and are flexible,not fixed like Federal Student Loans.These types of loans do not give the borrower discounts,benefits or subsidies in any way as far as interest rates are concerned,and are for rigid with their rules.Chances are you may spend a good portion of your life with your private loan if you default on payments.