29 Jul Know the Differences Between Federal and Private Student Loans
It is that time of year when plans for the fall college semester fall into place. One way or another, in-person or online, classes will go on in spite of COVID. Given the fact that they will be providing a valued education to students, it is not surprising that colleges expect to be paid for those services.
By now, those students who will be in college this fall should have their financial situation pretty much in focus. You should know what your financial aid package is, and should have contacted the financial aid office if your situation has changed due to COVID. You should also know whether you are eligible for the Federal Work-Study Program, and how much money you can anticipate in scholarships.
If your budget calculations still fall a bit short and your family does not have any additional financial resources, you may have to consider borrowing money through student loans. You can use federal student loans, or private student loans which are offered by banks, credit unions and other organization. While both accomplish the purpose of providing money to pay for college, be aware that there are some differences which could affect your future finances:
• Interest Rates: Because they are offered through the federal government, interest rates on new federal student loans have been reduced substantially due to the COVID crisis. These are fixed rates, which will not change for the life of your loan. Private loan lenders do not have the resources of the federal government, so they may have to charge higher interest. If they do offer a lower variable rate for now, be aware that it could go up if the economy improves post-pandemic.
• Interest Subsidies: Students with financial need may qualify for Direct Subsidized Loans, which means that the government pays the interest for you while you are in school. In most cases, private student loans do not have subsidized interest, which means that you will be responsible for interest during your school years. This could add up to a substantial amount that will have to be repaid on top of your principle loan.
• Deferred Payments: Federal student loans allow you to wait until after graduation to begin repayment. While some private loans do this as well, there are others which expect you to make payments during your school years.
• Credit Check: Most students do not have any credit history, so a big benefit of federal student loans is that they do not require a credit check or co-signer. Private lenders may require a credit check and co-signer if you do not have a credit background.
• Repayment and Postponement Options: Down the road, you might appreciate the wide array of repayment and postponement options that are available on federal student loans. They have a great deal of flexibility which allows you to work within your future budget parameters. You have to check with each private loan lender to determine their policies in these matters.
• Loan Forgiveness: There are several instances where you may be able to have your federal student loan debt forgiven. This is not usually the case with private loans.
You must first file the FAFSA to be eligible for federal student loans. You should have completed this for the 2020-21 session. If you plan to go to college in 2021-22, you will have to submit another FAFSA which will be online beginning October 1, 2020.
If you are concerned about borrowing money every year, you can still apply for scholarships. Some have later deadlines, and some require that you are already in college. The CFAA Scholarship Program helps you locate, organize and apply to personalized scholarship opportunities. Visit our website, and enter your name and email to receive a FREE COPY of “Top 5 Tips for a Successful Scholarship Search.”
It is always best to check your eligibility for federal student loans first, and then supplement those amounts with loans from private sources. For the latest financial aid information, look for my weekly JustAskJodi emails and tune in for my weekly Twitter chat at #CollegeCash every Thursday at 5pm Pacific/8pm Eastern.