There are two major forms of student loans – Federal and Private.
Federal student loans are loans that are borrowed from the government, either directly or through a Family Federal Education Loan lender to pay for educational expenses. These loans are also known as Stafford loans. The only way to obtain these low-interest Stafford loans is by submitting a Free Application for Federal Student Aid (FAFSA). Once your FAFSA application is received, your eligibility will be reviewed for a subsidized loan and/or an unsubsidized loan.
Private student loans are primarily credit-based consumer loans for the sole purpose of covering educational costs. To apply for these loans, you have to have an established credit history of least 18 months. If you do not have an established credit history, you then have to obtain a co-signer to apply.
Federal loans are more advantageous than both private loans and credit cards for two major reasons: 1) Stafford loans have a low, fixed interest rate (see chart), and 2) they offer many repayment options.
For more information, please refer to Federal Aid First: Information On Federal Education Loans And Private Education Loans
Federal Stafford Loan fixed interest rates (a 5-year chart) |
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|
Undergraduate |
Credential & Graduate |
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Academic Year |
Subsidized |
Unsubsidized |
Subsidized |
Unsubsidized |
2008 - 2009 |
6.0% |
6.8% |
6.8% |
6.8% |
2009 - 2010 |
5.6% |
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2010 - 2011 |
4.5% |
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2011 - 2012 |
3.4% |
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2012 - |
6.8% |
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Side-by-Side Comparison of Stafford and Private Student Loans
Stafford |
Private |
|
Fixed/capped interest |
Yes |
Most lenders do not offer fixed/capped rates |
Fees and interest |
Regulated |
Unregulated |
Interest Subsidies |
Possible |
No |
Dischargeable |
No |
no |
Repayment options |
Five |
Limited |
Postponement |
Yes |
Unlikely |
Forgiveness options |
Yes |
No |
Loan counseling |
Required |
Possible |
Impacts cohort default rate |
Yes |
No |
Tax refund can be re-directed to loan payment |
Yes |
No |
Subject to wage garnishment |
Yes |
Yes |
Annual limits |
Yes |
Possible |
Tax benefits |
Yes |
Yes |
Ombudsman |
Yes |
Possible |
Requires good credit |
No |
Yes |
Cosigner required |
No |
Possible |
Incentives |
Yes |
Yes |
(courtesy of EDFUND link Volume2, Issue 21 - 11/14/08)