The government funds federal loans, while banks provide private loans.
This is a key distinction, because federal loans offer borrowers certain terms they may not be able to get with a private loan.
For instance, federal loans offer borrowers income-driven repayment plans in the event they have difficulty affording the repayment.
Students also don’t have to start paying back the federal loan until after they graduate, leave school or reduce their enrollment status to below half-time.
These loans also offer fixed interest rates. Currently, the rate on an undergraduate federal loan is 5.05 percent.
On the other hand, private student loans may have fixed or variable rates, and they may require that you make payments while your child is in school.
Interest accrues in the meantime and is added to the principal amount owed once your child graduates.
Further, if you or your child run into problems with affording the monthly payment on a private loan, you’d have to work with your lender to figure out a solution. Unlike with a federal loan, you wouldn’t have an income-driven repayment plan to fall back on.
“We forget that many of the students borrowing this money are 18 and have never borrowed before,” said DePaulo. “This first loan is the longest one they will have.”