Know the difference between private and federal student loans

If you’re taking out a student loan, it’s important to know the difference between private and federal loans. While many people have the misconception that federal student loans are offered by the federal government itself, this is not the case. Federal loans are offered by private institutions. However, they are backed by the federal government. Here’s what you need to know about the different student loan options.

Private student loans often have higher interest rates

Private student loans tend to have a higher interest rate than federal student loans. One reason for this is the fact that they are not backed by the federal government. Furthermore, the interest rate on private loans varies depending on the current economic conditions. If you are planning to take out a private student loan now, the interest rate is still likely to be very low if you choose a private loan.

If you default on a federal student loan, the collections process is different than it is for private student loans

The federal government has more collection powers than private lenders. As with defaulting on a private loan, defaulting on a federal student loan can result in damage to your credit score. Unlike private student loans, federal loans are not automatically forgiven if you declare bankruptcy. Furthermore, there isn’t a time limit on the collection process for federal student loans in default. 

There are restrictions on who can take out a federal student loan, which doesn’t apply to private loans

Most people will qualify for federal student loans. However, there are income restrictions, which are often higher than the income limits for many other forms of student aid. 

You’ll need to meet credit requirements for either federal or private loans

You will need to meet credit score requirements for both federal and private student loans, which vary from one lender to another. However, a credit score of 670 or higher will allow you to qualify for most private and federal student loans. Furthermore, the amount that you can borrow with private or federal student loans partially depends on your income.