Private and Federal Student Loans for College: Which Works Best for Your Child?

When your child must take out a loan for college, you may wonder about the differences between private and federal student loans. Let's break them down so you understand which type makes the most sense for your needs.

Differences Between Private and Federal Student Loans

• Federal student loans carry fixed interest rates. However, private student loans could involve a fixed or variable interest rate based on market conditions.
• Federal student loans may offer multiple flexible repayment plans. For example,  you may access an income-driven repayment plan or an extended repayment plan. Popular banks and private financing companies offer a variety of interest rates as well as flexible repayment plans. However, private student loan companies may not offer as much flexibility and they do not offer loan forgiveness. 
• Federal loans offer forbearance and deferment. This means you can postpone student loan payments when you can't afford to make payments. Most private lenders only offer deferment programs if you are in the military or enrolled in school.

It's a great idea to know the differences between the two before you settle on private or federal student loans.

Private Student Loans 101

You may have heard that you should steer clear of private loans when you need loans for college because private loans carry higher interest rates. However, most private lenders limit the amount you can borrow. Though your child can't borrow an unlimited amount of loan money, students can usually borrow up to their school's cost of attendance. 

You do have some additional flexibility when your child gets private student loans because you can choose to get a private student loan from a credit union, private bank or another financial company.

Note that your child may need a cosigner to get a private student loan because undergraduates in particular cannot prove a credit history. You, the parent, must undergo a credit check in this situation. 

Depending on your child's level of education, they may need to access the following types of loans: 

• Private undergraduate student loans: Undergraduate students can get these types of loans. You, the parent, must submit credit and income proof for review. That way, the lender determines your ability to repay the loan and determines your interest rate. 
• Private graduate student loans: Graduate students can tap into this type of student loan. Your graduate student might need you to cosign the loan due to a lack of sufficient credit. However, a graduate student with a decent credit history may also apply and qualify individually. 
• Private parent student loans: Private lenders often offer parent loans directly to parents who want to help their child pay for education expenses. The student does not have a legal obligation to repay a parent loan.

How to Get a Private Student Loan

Take a look at the step-by-step guide to help your student get a private student loan.

Step 1: Shop around. 

Look into all the details, from payment terms to fees, to find the best loan for your needs. You want to know the full costs before you get the right loan for you. Remember that if you must cosign a loan, all the payments will fall on you if your child fails to make payments on his or her loans.

Step 2: Gather some information and fill out the application. 

Before you can apply, you need some information, such as your address, Social Security number, school information, academic enrollment period, requested loan amount, employment information and more. Your lender will let you know what information it needs. 

Step 3: The lender reviews your credit. 

The lender will review your credit, additional information and documentation. Some lenders offer instant loan approval.

Step 4: Choose your loan. 

Help your child pick out loan terms, accept them and sign your loan agreement electronically. Then, the school will certify your eligibility and enrollment and also verify your child's loan amount. 

Federal Student Loans 101

Federal student loans come from the U.S. Department of Education. They have lower interest rates and more flexible repayment plans for borrowers compared to private student loans. You can choose from Direct Subsidized and Direct Unsubsidized loans. 

• Direct Subsidized Loans: Direct Subsidized loans are need-based, which means you must show financial need in order to qualify for them. The federal government pays the interest on these loans as long as your child is enrolled in school, for the first six months after your child graduates and during any deferment or forbearance period.
• Direct Unsubsidized Loans: Undergraduate, graduate and professional students can take advantage of Direct Unsubsidized Loans. They are not need-based. Your child must pay the interest on unsubsidized loans, even while your child is in school — the federal government does not pay the interest.
• Direct PLUS Loans: Parents of a dependent undergraduate student can tap into a Direct PLUS loan. You’ll undergo a credit check to verify your credit history if you want to get a Direct PLUS Loan.

How to Get a Federal Student Loan

Your child can get federal student loans for both need-based and non-need-based purposes. 

Step 1: To qualify for a federal student loan, you must submit the FAFSA. 

The Free Application for Federal Student Aid (FAFSA) requires you to fill out information regarding your student's financial status, especially about income and investments. Once you submit the FAFSA, you can have it sent to the schools on her shortlist. 

Step 2: Financial aid offices use the FAFSA results.

Financial aid offices at colleges use something called the Expected Family Contribution (EFC) and cost of attendance (COA) to determine your final financial aid award. The financial aid award may include a combination of federal financial aid such as federal Pell grants, federal loans and paid work-study jobs.

Step 3: Decide which federal loans you want. 

Your child Direct Subsidized federal student loan but decide not to take a Direct Unsubsidized federal student loan (more on the differences between those two in a second).

Consider a Combination of Both

Private and federal student loans both offer major benefits. As a parent, you may want to help your child navigate between private and federal student loans. The right answer might end up being a combination of both private and federal student loans, based on interest rates, loan terms and more.