If you need education loans, it’s generally best to start with federal student loans. Private loans may come in handy, but only after you’ve borrowed everything you can using government programs. Below, we’ll discuss exactly how you benefit using federal student loans.
Qualifying for Loans
One of the main advantages of federal student loans is that they’re easy to qualify for. Banks don’t want to lend you money unless they’re sure they’ll get the money back. As a result, you generally have to qualify by having sufficient income and credit history (which most young students don’t have). Federal student loans are different—you can qualify for certain loans without any credit check or income.
Repaying Federal Student Loans
Another advantage of government loans is the flexibility you get at repayment. You may be able to choose extended repayment (which costs more in interest but results in a lower monthly payment) or a payment that changes as your income changes (which means you pay less when your income is lower).
Federal loans also allow you to pause repayment under certain conditions such as unemployment. Skipping payments may result in higher lifetime costs (if interest continues to build on your loan balance), but it may make it easier to get through some tough spots.
Private loans may offer some flexibility, but private lenders are generally less accommodating. Any options you have will be listed in your loan agreement; every lender is different so you’ll have to do some extra homework and close reading to understand your options.
Federal student loans, on the other hand, are well documented and you can find answers and insight from a variety of sources. To simplify and reduce the number of loans you have, federal loans can be consolidated (which is not always a good choice). Private student loans typically need to be refinanced instead.
The main appeal of some federal loans is that your interest costs might be subsidized. In that case, the government pays your interest for you so you don't have to come up with the cash (or add those interest costs to your loan balance—which would mean more debt for you to repay down the road).
Interest rates on federal student loans might be lower than rates you’ll find on private student loans. Federal loans are offered by or guaranteed by the government, which means that a nation of taxpayers will foot the bill if you fail to repay. Depending on your credit and interest rates overall, federal loans could cost more or less—be sure to compare both types and watch for loans with a variable APR. Keep in mind that there are interest rate "caps" or maximums in place that will keep federal student loans affordable in high-interest rate environments.
Interest rates are also fixed. This helps you plan and budget, and fixed rates will help if interest rates skyrocket over the years during which you repay your loan.
Federal Student Loan Forgiveness
Federal student loans can be forgiven in several ways; the loan becomes “free money” that you don’t need to repay. It’s not instantaneous or easy to qualify for loan forgiveness or discharge, but it’s a nice to have it as a possibility—and it’s generally not available with private student loans.
You might qualify for federal student loan forgiveness as a result of your job. “Public service” employees may benefit from forgiveness after a number of years of service. For federal student loan forgiveness, public service includes (among others) the following:
- Government employees
- Public school teachers
- Certain nonprofit organization employees
- Nurses and other healthcare professionals
You can learn more about the possibility of loan forgiveness at the Department of Education's website.
Loans may also be discharged at the death of a student. While most personal (individual) loans go away when the borrower dies, PLUS loans are unique: with a PLUS loan, the parent is the borrower, but the loan may be forgiven if a child dies. No parent wants to benefit from this, but it is a helpful feature that can ease the financial burden of a grieving family.
Different Government Loan Programs
Note that government loan programs vary, and the rules have changed over time. Figure out which program your loans are part of, and learn about the tradeoffs that are most important to you. Although you're almost always better off with some sort of government loan, you may need to consolidate certain loans under the Direct Loan umbrella to qualify for some of the benefits above. For example, certain public service employees only qualify for loan forgiveness under the Direct Loan program, while some teachers might benefit under either program.