The debate between federal vs. private loans has been going on for a long time. Both loans are great sources for helping college students finance their education. All types of student loans for first-generation students have their merits and drawbacks, making it essential for borrowers to understand the key differences before deciding.
This guide will dive deep into the difference between federal and private student loans. By the end, you’ll be able to determine which type of loan is best based on your unique circumstances.
What Are Federal Student Loans?
Federal student loans are provided by the U.S. Department of Education and are available to students who complete the Free Application for Federal Student Aid.
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To qualify, these are the usual requirements:
- US citizen or an eligible non-citizen
- A valid Social Security number
- At least half-time enrolment in an eligible program
- Good academic progress
- On-time payment of existing federal loans
You could lose eligibility if your grades slip, your parent’s income increases, or you drop below half-time enrollment.
These loans are pretty easy to get since they usually don’t require a credit check, proof of income, or a co-signer. But remember, you do have to pay them back, plus interest.
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Types of Federal Loans
Direct Subsidized Loans
Direct subsidized loans are for undergrad students with financial need. It has a 6.53% interest rate, a fee of 1.057%, and a grace period of 6 months. If you qualify, the government covers your interest while you’re in school at least half-time, during the six months after you graduate, and during deferment periods.
Direct Unsubsidized Loans
Unlike direct subsidized loans, direct unsubsidized loans are open for undergrads, grads, and professional students. However, these aren’t based on need, so interest starts accruing while you’re in school and during deferment.
The interest rate for undergrads is 6.53%, while it’s 8.08% for grads and professional students. There is also a fee of 1.057% and a six-month grace period.
Parent PLUS Loans
This type of federal loan is for parents of dependent undergraduates with no bad credit. Only biological, adoptive, or step-parents can apply (guardians can’t). Moreover, a credit check is required. There’s also usually no grace period, but parents can ask for six months after the student leaves school.
The interest rate for this loan is 9.08%, and the fee is 4.228%.
Grad PLUS Loans
Grad PLUS loans are for grad and professional students with no bad credit. Similar to the parent PLUS loans, they have an interest rate of 9.08% and a fee of 4.228%. There’s also a 6-month grace period.
Consolidation Loans
Unlike other types of federal loans, the interest rates for these loans are the weighted average of the consolidated loans, and rounded up to the nearest eighth percent. There is no fee, and there is a 60-day grace period after the loan is disbursed.
Your borrowing limits depend on your year in school and whether you’re dependent or independent. Here’s a quick breakdown:
- 1st Year Undergrad: $5,500 (dependent) / $9,500 (independent)
- 2nd Year Undergrad: $6,500 / $10,500
- 3rd Year Undergrad: $7,500 / $12,500
- Grad/Professional Students: Up to $20,500
You have several repayment plans to choose from, including:
- Standard: Fixed payments over ten years.
- Graduated: Begins with lower payments that increase every few years.
- Extended: Fixed or graduated payments stretched over 25 years.
- Income-driven Plans: Payments based on your income, which could be as low as $0!
If federal loans aren’t an option, you can access private loans for online college students!
Understanding Private Student Loans
Private student loans, also called personal loans, are offered by private lenders to help cover educational costs. They aren’t part of the federal loans for first-generation students, so they lack the same repayment flexibility and protections. So, many would say that these are not the best loans for online students, especially first-generation students.
You can often borrow up to your total tuition costs (minus any financial aid), and repayment terms range from 10 to 15 years or more. Some loans allow interest-only payments while you’re in school or let you defer payments until after graduation, but that means more interest will build up.
Interest rates can differ widely among lenders and depend on your credit score, unlike federal loans, which are available to everyone. Many private loans have variable rates that can change over time, while some offer fixed rates.
Here are examples of private student loans.
ISAs work differently from traditional loans. Instead of fixed monthly payments, you pay a percentage of your income for a set number of years. Check the income percentage and repayment terms, as there are usually salary caps to keep things fair.
Degree-Specific Loans
Private lenders often provide loans for undergrad and grad students, but some offer specialized loans for fields like medicine, law, and business. These loans might come with perks tailored to those programs, like higher amounts and longer grace periods for medical students.
State-Specific Loan Programs
Many states have their student loan programs through agencies. These loans are often for students attending colleges in that state but can also include residents studying elsewhere. Eligibility rules vary by state.
Parent Loans
Some lenders have loans specifically for parents to help cover their child’s education costs. These work like standard private loans, but it’s the parent who becomes responsible for repayment, not the student.
International Student Loans
Loan options for first-generation college students from other countries are very limited—almost none—so private loans are often their only option. Some lenders focus on loans for international students, but they might require a U.S. co-signer. Just be aware that these loans often have higher interest rates because they’re riskier for lenders.
Key Differences Between Federal and Private Loans
| Federal Loans | Private Loans | |
| Type of interest rates | Fixed rates only | Variable or fixed rates |
| Loan amounts | Up to $57,500 for undergraduates; up to the full cost of attendance for graduates. | Up to the full cost of attendance |
| Grace Period | Up to 6 months | Can be up to 12 months |
| Repayment Terms | 10 years standard | 5 to 20 years |
| Prepayment Penalties | None | Varies by lender |
| Subsidies | The government may subsidize student loan interest if eligible. | Interest is not subsidized by the government. |
| Co-signer Requirement | No | Often required |
| Credit Check Required | Typically, no | Good credit is typically required |
| Tax Benefits | Interest may be tax-deductible | Interest may be tax-deductible |
| Best For | Most borrowers | Those needing more funding |
Pros and Cons of Federal Loans for First-Generation Students
Federal Loan Benefits
- No Credit Check Needed
- No Co-signer Required
- Lower Interest Rates
- Flexible Repayment Options
- Borrower Protections
- Loan Forgiveness
Federal Loan Drawbacks
- Origination Fees
- Borrowing Limits
- Income-Based Qualifications
- Higher Costs for PLUS Loans
Pros and Cons of Private Loans for First-Generation Students
Private Loans Benefits
- Higher Borrowing Limits
- Quick Funding Process
- Competitive Interest Rates for Creditworthy Borrowers
- Customizable Loan Terms
Private Loans Drawbacks
- Limited Repayment Options
- Credit-Dependent
- Variable Interest Rates
- Fewer Borrower Protections
Which Loan is Right for You? Factors to Consider
When to Go Federal:
- Better Rates & Benefits: Federal loans usually have lower interest rates and come with perks like income-based repayment plans and potential forgiveness for certain careers.
- Easier to Get: They’re a great option if you have bad or no credit since qualification is simpler.
- Overall Recommendation: Experts advise using federal loans first—more benefits mean less financial stress down the line.
- Career Paths: If you’re aiming for a job that offers loan forgiveness (like teaching or public service), federal loans are a smart choice.
When to Consider Private:
- Customization: Private loans let you pick your terms, payment plans, and interest rates—options range from 5 to 30 years, and you can choose fixed or variable rates.
- Good Credit? Go for It: If you or your co-signer have excellent credit, private loans might offer lower rates than federal ones.
- Co-signer Flexibility: Want a co-signer release option in the future? Private loans allow for that, unlike federal loans.
- Immediate Need: If you’re in a tight spot and need funds quickly, private loans often have a streamlined application process that can get you money faster.
Many students still turn to them despite the high private loan interest rates for a few key reasons. Federal loans have limits, which can leave financial gaps. Private loans can help bridge those financial gaps when college costs keep climbing.
Choosing between federal and private loans as a first-generation student all boils down to your financial situation and goals. Both types of loans can impact your future earnings in positive and negative ways. Just remember to borrow responsibly—know your debt and future earnings, and be ready to manage repayment once you finish school.
How to Apply for Federal and Private Student Loans
Applying for Federal Loans
To access federal student loans and aid, just fill out the free FAFSA form, which opens every October. Do it the year before you start school and reapply each year. Here’s a step-by-step breakdown:
- Open the FAFSA.
- Create an FSA Account.
- Collect your ID, financial info, and any required info from your parents if you’re a dependent.
- Fill Out the FAFSA. This should take about 30 minutes.
- After submitting, check the Student Aid Report for accuracy.
- Colleges will send you financial aid letters that detail loans, grants, and work-study options.
- Before you can accept loans, you must complete counseling to understand repayment terms and avoid default.
- Compare offers, choose a school, and contact them to accept the aid.
Applying for Private Loans
Private loans don’t depend on financial need, and you’ll apply directly through the lender’s forms instead of using the FAFSA. Here are the steps to get a private student loan:
- Check out different lenders for loan amounts, interest rates, fees, and repayment plans. Make sure they have good reviews and solid customer service, especially for hardship options.
- Look at your credit score and income to see if you meet lender requirements. A score of 670 or higher is usually needed.
- You’ll need to provide information about your school, costs, degree type, Social Security number, and proof of income.
- The lender will confirm your school costs, which might take a few weeks, and then send the funds directly to your school.
Student loans are a major commitment and can take years to pay off. Before accepting any loan terms, here are a few borrowing tips for online students to remember.
#1: Borrow only what you need.
When deciding how much to borrow, keep these points in mind:
- The school’s cost
- Your chosen major
- Potential salary after graduation
Your school and major can impact your future earnings, so consider whether you’ll make enough to repay your loans. Your monthly payment should ideally be no more than 10% of your expected gross monthly salary. You can use student loan payment calculators to see what your payments might be and make sure you stay under that 10% guideline.
#2: Avoid the common pitfalls.
Take your time to understand the loan terms before deciding—don’t just grab the first offer. You should also watch out for sneaky fees; some private loans come with extra costs that can add up. And definitely read the fine print!
Important things you should understand when taking on student loans:
- Interest rates
- Repayment terms
- Late payment penalties
#3 Seek professional guidance.
To ensure you proficiently navigate affordable loan options for first-generation students, consult with loan counselors or financial aid advisors. Both the private and federal loan application process can be confusing and complicated. A pro can help you understand the process and make it less overwhelming.