Chapter 1. What are the differences between federal and private student loans?

Federal Loans are made by the federal government. Federal loans have many advantages in borrowing over private loans. They usually offer lower interest rates and have more flexible repayment options than banks or other private financial institutions. They also do NOT require a credit check or a co-signer (excluding Direct PLUS Loans). With federal loans, you do NOT have to repay your loan until after you graduate/leave college or drop below half-time.

In order to receive federal student loans, you have to apply each year by filing the Free Application for Federal Student Aid (FAFSA) Links to an external site.. This will be used to determine your eligibility. The school of your choice will then determine your final financial aid package.

Before you take out a loan, it is important to understand your legal obligation and responsibility for repaying that loan with interest. The two most common federal student loans are Subsidized and Unsubsidized student loans.

• If you are eligible for the Direct Subsidized Loan:
  • Interest rate on your loan will be subsidized by the federal government during your enrollment in college
• If you are receiving the Direct Unsubsidized Loan
  • Interest is accruing on your loan during your enrollment in college
  • In this case, it is financially sensible for you to pay this interest while in college to prevent your loan from accumulating interest on top of the original principle

A  Private loan's terms depend on the financial institution issuing the loan. It is advisable that you read, in full, the terms of your loan and investigate if you are able to pay down the interest portion while in school in order to prevent your loan from growing exponentially during your enrollment in higher education.

 

 

How to

You need to think of your educational goals and expenses as an investment in your future. The purpose of reaching for higher education is not only to enjoy a new adventure but also to prepare you for a better future  - including a future of financial security and freedom. This is especially critical for adult learners who decide to go back to school to build a more secure financial future for themselves and their families. Their investment carries a higher risk if fully financed by student loans. It is advisable that they make a financial plan to search for scholarships or employee assistance programs before they embark on such an adventure.   

 

Practice

Now that you know the differences between federal and private student loans, discuss your educational goals and your borrowing plans with a friend or a family member. Decide how you can pursue higher education with a winning investment plan in your future.

 

Congratulations! You can move on to Chapter 2. Terminology and resources

To review the full module on Student loans, click here.