Federal and private student loans can work together

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Ask a Lender
September 8, 2017


Key Points

Government vs. private student loans

  • Government student loans do not require a credit check.
  • Students do not need to begin paying back government student loans until they leave school.
  • Government student loan programs have lower interest rates than many private student loans.
  • Maximum loan limits on government loans may leave financial gaps that private loans can fill.

Most students who apply for financial aid to help cover tuition, housing, books and other school expenses will be offered one or more types of government-backed student loans as part of their financial-aid package.

Some students, however, may need to seek out private student loans through a lender to cover their costs. It makes sense, then, to know the differences between the various government and private student loan programs.

Government loans

There are two major types of government-backed student loans: Stafford loans and Perkins loans. In addition, there are PLUS loans, which are available to parents of students as well as graduate and professional students — such as individuals attending law school. Stafford loans are either subsidized or unsubsidized.

Subsidized Stafford loans are awarded based on financial need and the government pays the interest on the loan while the student is in school. The amount of money a student can be awarded annually through a subsidized Stafford loan also is smaller than the amount that can be awarded through an unsubsidized loan. Graduate and professional students are only eligible for unsubsidized Stafford loans.

Perkins loans also are awarded to undergraduate, graduate and professional students based on need, but are harder to get than Stafford loans. These loans are administered directly through the school, using money provided by the federal government. Thus, the awards are based not only on student financial need, but also on availability of funds at the college.

Stafford and Perkins loans have maximum annual and total amounts (the amount that students can borrow throughout their educational careers). Students may not exceed these amounts, no matter their need. Maximum amounts and interest rates on these loans can change. Check with your school's financial-aid office for current information.

PLUS loans are only available to parents of dependent undergraduate students, or to graduate and professional students. The maximum amount of these loans is only limited by the cost of attendance. Interest rates on PLUS loans are generally higher than on Stafford or Perkins loans, however, and borrowers cannot have a negative credit history as a condition of qualifying.

Private student loans

Private student loan rates and terms can differ widely depending on the lender that originates the loan, so be sure to shop around. There are some major differences between private loans and government loan programs. The biggest difference is that private loans often may require the borrower (student) to have an established credit rating to secure the loan.

Government loans do not require a credit check. In addition, the credit check for a private student loan will likely determine the interest rate, which often will be higher than the interest rate on a government student loan.

Another major difference between private and government loans is that students who take out government student loans do not have to make payments while they are in school, or during a grace period (usually six months) after they leave school or are no longer attending school full time. Many private loans require students to begin making payments immediately, even while they are still attending college.

Finally, with government loans, students can consolidate all of their loans after they leave college into a single loan. Students also can get a deferment from the government on paying back their loan if they can show financial hardship. This deferment can last for up to three years if the borrower is unemployed. Private student loans cannot be consolidated into government loans and generally will not allow deferments.

So, why take out a private student loan? Government student loans all have lending limits, which may not cover all of a student's expenses, depending on the school they attend, the grants and scholarships they receive and the help they can expect from their parents. Private student loans often have better interest rates and terms than personal loans, and they almost always are less expensive than using credit cards to pay for college expenses.

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