Why You Should Opt For Federal Student Loans

When you’re shopping for a loan to fund your education, you’ll have to choose one out of two key available options.

You can either opt for a federal student loan or a private student loan. But what’s the difference between both types of loans?

Here’s the deal:

Federal student loans are formed by the government. The terms and conditions of these type of loan are set by the law.

While private student loans are created by private business entities like banks and credit unions etc. The terms and conditions of these loans are determined by the lender.

So why should anyone choose a federal student loan ahead of a private loan?

Let’s find out!

Why Federal Student Loans Are Better

1. Your Credit Score isn’t a Factor

Private lenders use credit history to figure out if you’re credit worthy and likely to pay back the debt at the right time.

Even more, private lenders will decide the interest rates you’ll get based on your credit score. This isn’t a good news for most college students.

Many college students have no credit scores at all. Those who do have low credit scores and short credit histories.

Good news is that federal loans are up for grab by any enrolled undergraduate and these loans doesn’t require a credit check.

The only federal loan that assesses your credit score is the direct PLUS loans which is for graduate students and parents.

Before you consider a private lender, you should secure the maximum amount of available federal loans.

A good place to start is by making a submission of the Free Application for Federal Student Aid also known as FAFSA.

However, if you still want a private loan to take settle some expenses or funding gap and your credit isn’t good enough, several different lenders will be willing to help you out.

You should check the credit score you need to qualify for a private student loan here.

2. Access To Forgiveness Options

Your federal loans can be dissolved if you opt for an income-driven repayment plan. Your loan can also be dissolved if you work for the government or for a nonprofit.

Public Service Loan Forgives pardons federal loans after a decade (a period of 10 years). You can even benefit from this forgiveness within a shorter period of time if you’re a Perkins loan borrower with a public service job.  

With a private loan, you won’t get any chance to be forgiven for your debt. You’re expected to make a full repayment of your debt.  

3. You Have No Business With A Co-signer

Eligibility for federal loans aren’t dependent on your credit score.

This means you’ll still get the loan regardless of your credit score and you don’t need a cosigner before your loan application is approved.

So whoever would have been your cosigner can heave a sigh of relief knowing they wouldn’t have to bother about the consequences of your debt.

With a private loan, college students and high school seniors with short credit histories can still be eligible with a cosigner who agrees to repay the debt if the student failed to pay.

But such responsibility can turn out to be a huge weight on the shoulder of the cosigner.

4. Freedom To Postpone Payments

As a result of economic hardship, federal loan deferment allows borrowers to postpone their payments for about three years.

But you won’t get such flexibility with a private loan. Private lenders are known to allow payments deferments for up to 12 months, for example in 3 months increment.

5.Open To Income Driven Repayment

With a federal student loan, you have the option to lower your payment if you want to.

You have the freedom to apply for income-driven repayment which allows you to pay a certain percentage of what you earn each month or $0 if you aren’t earning anything.

You won’t get the same opportunity with a private student loan.

Perhaps the most you can do is to reach out to your lender and request for interest-only payments or a reduction in interest rates within a specified period of time.  

6. Loan Cancellation At Death

If for whatever reasons you die or become permanently disabled as a result of a severe accident or any other reason, your federal student loans will be discharged.

However, for a private student loan, death discharge is based on each lender’s policy. While some lenders offer death discharge, others do not.

If you opt for a private loan, you should ask your lender about what will happen to your loan if you or your cosigner dies.

7. More Loan Default Time

With a federal loan, you have more time before your student loan default. This isn’t the same with a private loan.

With a private loan, you may end up in default once you miss a payment.

Private lenders do not have the same ability to make you repay your debt like the federal government does.

As such, missing your private loan payment will have a negative impact on your credit and the lender may decide to sue you.  

8. More Time To Bounce Back On Your Payment

If you fall behind on your payment for whatever reasons, federal loans will give you additional time to resume payments.

During such periods, you loans won’t be considered as delinquent and you case wouldn’t end up with the credit bureaus, not until you’ve not made any payments for three months.

Your loan can only end up in default if you’ve not made payments for nine months.

If this happens, the government can deduct the sum from your tax return or paycheck to make up for your debt.

9. You Can Consolidate Without Good Credit

If you have several different federal loans, you’re allowed to consolidate all of them into just one payment.

With a Federal consolidation, one or two of your loans may qualify for Public Service Loan Forgiveness and income-driven repayment programs.

However, there’s no possibility that this will save you any money.

This is because the rates you’ll get will be based on a weighted average of your previous loan’s interest rates.

10. You Can Refinance Your Student Loan Through A Private Lender

A federal loan allows you to refinance and consolidate your student loan via a private lender.

Doing this can slash your interest rates depending on your income and credit.

However, when you refinance, you will lose the benefits you’ll enjoy from having a federal student loan.

11. Less Interests Accumulates On Subsidized Loans

If you’re a student with a high financial requirement you’re eligible for federal direct subsidized loans.

The government is responsible for paying the interests on subsidized loans when you defer them, either during the period you’re in school, during your grace period and whenever you decided to take a break from repaying.

You won’t get any of these advantages with a private loan.

Rather, interests will start rising on private loans and on unsubsidized federal loans, once you receive their payments.

12. Fixed Lower Rates and Fees

The interest rates of private loans are typically higher than those of federal loans. Federal loan rates are fixed but private aren’t.

This means the rates will remain unchanged throughout the lifespan of the loan.

Private lenders often offer variable rates. These rates are raised whenever the Federal Reserve increases the interest rate level.

If you have the freedom to choose any one you want, you should opt for a fixed-rate private loan.

If you have good credit and strong income when you leave school, student loan refinancing can help you get a lesser interest rate.

Also, it can help you change variable-rate private loans into a less risky fixed-rate loan.  

Williams Oleije

Williams Oleije

Williams Oleije is an Inbound Marketer, and a pop culture enthusiast. He's an avid researcher about how digital media is transforming marketing in several industries.

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