What are the Differences between Federal Student Loans and Private Loans?

The simplest distinction between federal loans and private loans is the source of funding. One difference between federal and private loans is where the money comes from. Students with extreme financial need will qualify for federal loans which carry low interest rates and several perks that set them aside from private loans. There are two federal loan programs. The first program is called the Federal Direct Student Loan Program. With these Direct Loans, the U.S. government provides the funds directly to the students and their parents.

Private lenders such as banks, credit unions, and savings & loan associations provide FFELP loans, while the federal government guarantees these loans against default. Both federal loan programs offer Federal Stafford Loans, the most commonly awarded federal student loan. Lenders such as banks, credit unions, and savings & loan associations provide private loans. The federal government regulates private loan programs, but the loans are provided and guaranteed by private lenders and guarantors. Private loan programs will vary by lender.

Eligibility requirements for federal loans offer a number of differences when compared with private loans. For instance, Federal Stafford Loans do not require credit checks. Though credit requirements vary by lender, you'll be hard pressed to find private loans that don't require you to pass a credit check. To be eligible for a federal loan, you must be a U.S. citizen/national, or eligible non-citizen. Some private loans may offer options to international students who do not qualify for federal loans.

It pays to do your homework when it comes to education loans, both federal and private. The fees you pay at application can vary. For Federal Stafford Loans, the fees at application can be as high as 3%. Some lenders, such as Access Group, offer loans with no origination fee; this means more money for school, since none of your loan will be used up front to pay fees. The same applies to private loan fees. Researching different student loan providers can save you up to 6% - not all lenders offer student loans with fees as low as 0%.

When it comes to interest, Federal Stafford Loans have some benefits you usually can't find with private loans. For instance, you may be awarded a subsidized Federal Stafford Loan. If you are awarded the subsidized Federal Stafford Loan, the federal government pays the interest on that loan while you are in school. You may also get a break when filling out your tax return: you may be able to deduct up to $2,500 of the interest you pay on both subsidized and unsubsidized Federal Stafford Loans.

Private loans tend to have somewhat (and in some cases, significantly) higher interest rates than Federal Stafford Loans, and may use your credit score as a basis for determining your particular interest rate. Additionally, there is no such thing as a subsidized private loan; you are responsible for all the interest.