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

Posted on August 5, 2015 at 12:00pm by

An increasing number of students attending college or trade schools rely on private or federal student loans. At over $1.2 trillion total, student loans have become one of the most common forms of debt in the United States. However, there are significant differences between private and federal student loans:

  • Financial institutions or banks, such as Sallie Mae, are responsible for private student loan lending. The Department of Education or universities, through the Perkins and Stafford programs, are responsible for the majority of federal student loan debt.
  • Private loans can have varying interest rates, which in some cases are far greater than federal loans. For example, some private loans have interest rates that exceed 18 percent. High interest rates can significantly extend the repayment period and amount owed. Federal loans are fixed at lower interest rates, most commonly from 4 to 6 percent.
  • Repayment options vary between private and federal student loans. Federal student loans have programs such as the income-based repayment option, which ties the monthly payments of borrowers to a percentage of their incomes. Private student loans do not always have these repayment options.
  • Federal student loans are sometimes subsidized, meaning interest will not accumulate while students are still pursuing their studies. Private and unsubsidized federal student loans accumulate interest even while students are still in school. This means interest is added to the main balance of the loans while students are still enrolled.

Can Private and Federal Student Loans Be Discharged In Bankruptcy?

Depending on the circumstances, graduates might have options for discharging their student loan debt in bankruptcy. Previous blog posts have talked about the undue hardship and totality of circumstances tests. Depending on whether debtors file for bankruptcy in Missouri or Kansas, passing either test might lead to a reduction or discharge of debts.

The Sader Law FirmKansas City Bankruptcy Attorney