Whether you’re just starting college or planning your higher education journey, knowing how to finance your education is crucial. Most students rely on loans to pay for tuition, books, and living expenses. But not all student loans are the same.
The main distinction lies between private student loans and federal student loans. Understanding the differences between these two types of loans can save you money, stress, and confusion down the road.
What Are Federal Student Loans?
Federal student loans are loans offered by the federal government to help students pay for their education. They come with fixed interest rates and certain borrower protections that make them more favorable than many private loans.
Direct Subsidized Loans
These loans are available to undergraduate students who demonstrate financial need. The government pays the interest while you’re in school at least half-time, during your grace period, and during deferment.
Direct Unsubsidized Loans
Unlike subsidized loans, these loans are available to both undergraduate and graduate students, regardless of financial need. You’re responsible for the interest from the moment the loan is disbursed.
PLUS Loans
Parents of dependent undergraduates or graduate students themselves can borrow these loans to cover educational expenses not met by other financial aid. PLUS loans typically have higher interest rates and require a credit check.
Perkins Loans
Though no longer available, the Perkins Loan Program was designed for students with extreme financial need. Some students may still be repaying these loans today.
What Are Private Student Loans?
Private student loans are issued by private lenders such as banks, credit unions, and other financial institutions. These loans don’t offer the same protections or benefits as federal student loans and often come with higher, variable interest rates.
Banks and Financial Institutions
These are the most common sources of private student loans. Banks often offer student loans with variable rates, which can change over time, and typically require a cosigner.
Credit Unions and State Agencies
Some credit unions and state agencies offer private student loans with potentially lower interest rates or more favorable terms than large banks.