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Student Debt Guide: Types of Loans

Student Debt Guide: Types of Loans

What are the differences between student loans and other types of debt?

January 07, 2013

What are the differences between federal and private student loans?

To make understanding this question a little bit simpler, we’ve broken down the question into three categories: Interest rates, Repayment Benefits and Loan Eligibility.

Under each category is a heading, “Federal Student Loans” or :Private Student Loans" with the information listed for each type, to help you better grasp each loan option.

Interest Rates

• Federal Student loans:

-Have fixed interest rates that won’t change for the life of the loan and yields a predictable monthly loan payment

-Interest continues to accrue and is added to the loan balance if unpaid

-The federal government pays the interest on subsidized Stafford loans and Perkins loans during deferments, but not forbearances

-Borrowers are responsible for the interest on all other student loans during deferments and forbearances

• Private Student loans:

-Most have variable interest rates, which may change on a monthly or quarterly basis

-The interest rate and fees on a private student loan also depend on credit scores

-Interest continues to accrue during forbearances and is added to the balance, if unpaid

Repayment Benefits

• Federal Student loans:

-Offer more options for financial relief to borrowers who are struggling to repay their loans

-There are deferments and forbearances that can temporarily suspend the obligation to repay the loan

-The economic hardship deferment is available for up to 3 years and forbearances for up to 5 years

-Offer income-based repayment and public service loan forgiveness

-Offer other flexible repayment terms, such as graduated repayment and extended repayment

-Has much stronger powers to compel repayment of defaulted federal student loans

-Government can garnish up to 15% of wages without a court order

-Government can intercept federal/state income tax refunds without a court order

-The government can offset state lottery winnings

-The federal government can garnish up to 15% of Social Security disability and retirement benefit payments

-Collection charges of up to 20% of every payment are deducted before the remainder is applied first to interest and last to the principal balance of the debt, which can significantly increase the time it takes to repay the debt

-The federal government can block the renewal of a professional license

-Borrowers who default on a federal education loan are not eligible for a FHA or VA mortgage and cannot enlist in the military

-There are no statutes of limitation on federal education loans

-Have lower loan limits than private student loans, but this may be a good thing, since it prevents the student from borrowing too much

• Private Student loans:

-Typically offer forbearances for at most one year

-Private student loans may charge additional fees for forbearances

-Don’t offer income-based repayment or public service loan forgiveness

Loan Eligibility

• Federal Student loans:

-Eligibility is not based on the credit history of the borrower

-Do not require cosigners

• Private Student loans:

-Most private student loans are credit underwritten

-If you have bad credit, you won’t be able to get a private student loan, credit card, auto loan or mortgage

-If you need to borrow from the Parent PLUS loan or a private student loan, it may be a sign of over-borrowing

-More than 90% of new private student loans require a creditworthy cosigner

-Most traditional college students have a thin or non-existent credit history (or if they happen to have a credit history, it is usually a bad one) and so cannot qualify for a private student loan on their own

-Even if the student has good credit, it can be beneficial to have a cosigner, since the interest rate and fees on private student loans are usually based on the higher of the two credit scores

Note: Cosigners need to know that a cosigner is a co-borrower, equally obligated to repay the debt. The private student loan will appear on the cosigner’s credit history. This can make it more difficult to get new credit. Some cosigners, for example, have had difficulty refinancing mortgages because of the cosigned student loans on their credit history. Cosigning a loan is risky for the cosigner, since it ties the cosigner’s credit scores to the repayment behavior of the student. If the student is late with a payment or defaults on the loan, it ruins the credit history of both the borrower and cosigner.

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