What is the difference between the federal student loans versus private student loans? Paying for college may include one or both of these types of loans. Comparing your student loan options are somewhat limited for loans that will be in the student’s name only. Some of the federal loans are in the student name but the amounts are fairly low considering today’s cost of college. Parent PLUS loans are federal loans and the amounts are dependent on your credit history and the amount of financial aid you receive from the school.
The advantage to the federal loans is that they have a built in life and disability clause. If either of these situations occurs the legal owner of the loan would be forgiven of the debt. This is not true for private student loans. The interest rates on federal loans are currently fixed but a little higher than market rates. There are some discussions about moving the rate back to a variable rate with limits. Before 2008, most student loans had a variable interest rate that was adjusted each year.
Private student loans do have a few advantages in comparison to the federal student loans. The limits are much higher for the student. The downside is that the loan will need a co-signer that has a good credit score. The variable rate will be based on the co-signer’s credit score. When considering a private loan the co-signer should review the terms since they are legally liable for the loan if the student defaults. One item that should be considered is the release of the co-signer. Some private loans offer this provision after a series of on time payments. This time will vary by lender if offered.
You must remember that all student loans private or federal are not forgiven under bankruptcy. This needs to be considered before entering into this agreement.
This video compares the features of Federal Student Loans versus Private Student Loans:
Student loan limits
Student loan interest rates