Bad Credit Student Loans: Private Student Loans vs. A Federal Student Loan

Bad Credit Student Loans: Private Student Loans vs. A Federal Student Loan

Posted 07.03.2012 in Articles by Jess

With the cost of tuition on the rise, it can be disheartening when applying to schools. Many turn to student loans to help them afford their cost of attendance but there is much to know about the difference in student loans and what they truly offer. Most people apply for a student loan on a whim without completely understanding all of the aspects of the loan. The appeal is deferred payments until after graduation – 4 years of putting it in the back of your head. Instead of panicking about your loan after graduation, understand it before you even apply so you know what you have in store down the road. They may both end with the words “student loan”, but private and federal loans are two common but very different things. How so?

The government extends financial aid to students in the form of federal student loans. They do not require credit checks and have a variety of options for repayment plans, including deferral or extended repayment plans. There are options for both parents, called PLUS loans, and students, who receive Federal Stafford and the Federal Perkins loans.

A private student loan are offered by private lenders, and given out based on credit score. They are also known as Alternative Education Loans. Families looking for more flexible repayment options, as the governmental financial aid can be rather strict about loans, especially loans given to parents to finance their students’ education as opposed to the students themselves. Private loans are also used when federal financial aid is not enough.

Federal loans for students include the Stafford and Perkins loans. The main federal loan is the Stafford loan, which includes the Federal Direct Student Loan Program and the Federal Family Education Loan Program. The difference between the two is that the former is provided for by the government, whereas the latter is provided for by private companies such as banks. Stafford Loans are subsidized (the government will pay the interest as the student is in school) if the student demonstrates financial need. Unsubsidized financial loans are available for all students, regardless of financial need, though they tend to have a higher cost than subsidized.

Repayment terms for federal student loans tend to be 10 years. Stafford loans also have limits, depending on various circumstances including the type of program you are enrolled in, whether your parents received PLUS loans, and other factors. Stafford loans can sometimes pay for the entirety of one’s college or higher education (a “full ride”), or provide only a few thousand dollars a year towards college expenses.

Stafford Loans have a fixed 6.8% interest rate. To apply for a Stafford loan, students must submit the FAFSA (Free Application for Federal Student Aid) form, which will also include sending in tax returns.

The Perkins Loan is given to students with exceptional financial need. The school acts as the lender, though the government provides the money in a limited supply. It is the best student loan with a 5% interest rate and 10-year repayment plan.

Private loans, on the other hand, do not have fixed interest rates and are more expensive than federal student loans. One tip is to apply for a private loan with a cosigner, as this will lessen the risk of the loan being defaulted upon, resulting in lower rates.

Some students use a combination of subsidized and unsubsidized student loans, or student loans in combination with private loans. Be wary of the variable interest rates and make sure you know about repayment options. Some options for repayment include consolidating all the loans for a simpler repayment plan, though this does cost more.

 Funding for education is no easy task, and student debt can run extremely high. It’s best to enter into a plan that you know you will be able to repay and work out a repayment plan that fits your needs best. Research the interest loans, repayment plans and terms, and forgiveness options before committing. 


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