Federal College Loans

Private And Federal College Loans: Pros, Cons And Differences

College education is a priority for many, but the ever-increasing costs are beyond the financial reach of most families. If you do not have savings to cover yourself or your child’s college education, you may want to consider your loan options.

Key facts
You can obtain student loans through the federal government or from private lenders such as banks and credit unions.
Federal loans usually have more favorable terms, including flexible repayment options; President Trump has indefinitely suspended interest on these loans during the coronavirus crisis.
Students with “exceptional financial need” may qualify for subsidized federal loans; Debt-free loans are available regardless of financial need.

Private (Personal) Loans:
Private college loans could be obtained from several places, for example, credit unions,  banks as well as other financial institutions.

You can apply for a personal loan at any time and use the debt proceeds of your choice, including tuition, room and board, books, computers, transportation and living expenses.

Unlike some federal loans, private loans are not based on financial needs. In fact, you will need to pass a credit check to prove your credibility. If you do not have a credit history, or are poor, you may need a cashier on the loan.

Private loans may have a higher borrower limit than federal loans.

Federal Loans:
Federal student loans are given by the US Department of Education. They have lower interest rates and simpler repayment plans than personal loans. President Trump suspended interest on these debts indefinitely until March 13, 2020, during the coronavirus crisis.

To qualify for a federal loan, you must complete and submit the Government Free Application for Federal Student Assistance (FAFSA). FAFSA asks numerous questions mostly concerning student and parent earnings and investments, as well as other related personal information. Using that information, the FAFSA determines your family-owned family contribution (EFC). This shows that the government believes that you have to pay for college from your own resources.

The financial aid offices of colleges and universities determine how much assistance your EFC has, minus their attendance cost (COA). Attendance costs include tuition, required fees, room and board, textbooks and other expenses.

To help make a distinction between the cost of a particular college and the cost to pay for that family, the Office of Financial Aid puts together a support package. That package may include a combination of federal pell grants, federal loans and paid work-study jobs. Schools can also provide their own resources, for example, merit scholarships. The basic difference between a grant and a loan is that the grant is never repaid (except in rare cases), but the loans eventually do.

When it comes time to start repaying your student loans, you can consolidate or refinance them depending on whether they are federal loans, private loans, or a combination of both.
Types of federal loans
Ford Federal Direct Loan happens to be the most well known and largest of all federal student loan programs. These loans are sometimes called Stafford loans, which is the name of the previous program. Four types of federal direct loans are known and they are:

Direct discounted loan
Direct credit is a free loan
Direct Plus Loan
Direct consolidation loan

Direct subsidy(discounted) loan
This type of loan is given to students with exceptional financial need. The government subsidizes the interest on the loan when the student is enrolled at least half the time. You will not be charged interest on subsidized loans until you graduate, and you have a grace period of six months after you leave school before you need to start repaying the loan.

Direct Unsubsidized Loan
Unsubscribe loans are available to students regardless of financial need. Unlike subsidized loans, their interest starts accruing as soon as you receive the funds and continues until the loan is repaid in full.

Independent students who apply for a direct loan (as opposed to dependent students applying with their parents) may be eligible for a higher amount of unsubsidized funds.

There are many attractive benefits of direct loans, including the following:

No need to pass a credit check.
Low, fixed rate of interest (Private loans often have a variable rate.)
Some flexible payment plans.
No penalty for repaying the loan.
However, they also have some downsides, such as:

Low loan limit.
A new FFSA form needs to be filled out each year to maintain eligibility.
Strict limits on how you can use money other than a private loan.

Direct Plus Loans
Plus loans are designed for parents of college students and are not based on financial need. They have a number of attractive features, including the possibility of borrowing the full cost of a college loan (any other financial aid or scholarship). They have relatively low, fixed interest rates (but also higher than other types of direct loans), and offer flexible payment plans such as the ability to defer payments until student graduates.

Plus loans ensure mandatory pass in credit check by parent of the applicant and apply for funding in each academic year. Parents are legally obligated for the loan repayment.

In addition to parents of undergraduate students, plus loans are available for graduate and professional students.

Direct consolidation loan
When it comes time to repay a student loan, the government offers a direct consolidation loan, which you can consolidate based on the average rate of the loan you can use to combine two or more federal education loans into a consolidated loan. You cannot consolidate a private loan using a federal program, but private lenders can consolidate your loan, both private and federal, by paying off your old loan and introducing a new one to you. This is often referred to as refinancing.

Refinancing with a private lender may result in lower interest rates in some cases, but you will lose the flexible payment options and consumer protection that come with a federal loan. If you have both federal and private loans, it makes sense to consolidate the federal ones through a government program and refinance others through a private lender.

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