What are the Major Differences Between Private and Federal Student Loans?

The most recent statistics on higher education debt show that more than 44 million Americans carry $1.4 trillion in student loans. You read that correctly. This figure implies that Americans owe more in student loans than credit card debt. While a majority of borrowers have federal student loans, there are some who have private higher education debt. Federal loans are funded and issued by the federal government. Private loans are issued by banks or other private sources. However, there are many other differences between the two types of loans.

1. Private loans can have variable interest rates. Interest rates for private student loans can increase. As your interest rates increase, so do your monthly payments. Depending on your credit history, you may be offered lower initial rates by a private lender for accepting this risk.
2. Income-driven plans are not available for private loans. We have blogged extensively about income-driven repayment plans (IDR plans) for federal loans. IDR plans cap your monthly payments to a percentage of your discretionary income. This means your monthly payments could be $0 if you are not receiving income (unemployed). Private lenders do not offer income-driven plans.
3. Private loans are not subsidized. Certain types of federal loans, at least for the time being, are subsidized by the federal government. This means that interest does not accumulate while you are still pursuing your education or while you are in deferment. Private loans do not have this advantage.
4. Private loans are not eligible for federal loan forgiveness. There are several ways to obtain forgiveness if you have federal student loans. IDR plans offer forgiveness after a certain number of payments. Forgiveness options may also be available to borrowers who have suffered a permanent disability. Private student loans lack these options because they are not backed by the federal government.
5. Private loans may require a cosigner. Eligibility for a private student loan is based on your creditworthiness. You could require a cosigner to qualify for a private student loan if you have a poor or thin credit history. Your cosigner could be on the hook for payments if you die or experience financial problems. However, there are ways to release a cosigner from liability. You might be eligible to refinance your private loans with another bank or you could apply for a cosigner release through your lender.
6. Private lenders may not allow you to seek deferments or forbearance. You can apply for an economic hardship deferment with federal loans if you cannot afford payments. Although interest would accrue on your unsubsidized loans, a deferment would temporarily halt unaffordable payments. Private lenders may not allow you to defer your loan payments. They could approve or deny your request at their discretion.

What Should I Know Before Getting a Private Student Loan?

There are possible advantages to private loans. For instance, you could receive very low interest rates if you have excellent credit. Private student loans may also have higher borrowing limits.

Despite these possible advantages, private loans lack the protections that are afforded to federal loans. It may be more difficult to default on federal student loans if you are knowledgeable about your options for lowering or halting payments. You may have a more difficult time preventing default if you carry private student loans. This is a risk that you should consider before signing the paperwork for a private student loan. You never know when life may decide to hand you lemons.

Contact Our Kansas City Student Loan Attorneys for More Information

The Kansas City student loan attorneys at The Sader Law Firm have experience helping people who are struggling with private and federal student loans. We could inform you of possible options for debt relief or lower payments.