How do private student loans differ from Federal student loans?

Differences between private and Federal student loans

Private student loans look much like Federal student financing, but have some significant differences. It’s important to know the differences and accept them for what they are.

Independent lenders must operate like all other private businesses. They must offer products or services that are desired by consumers, and they must do so at a profit. Here are some important differences:

• Many private lenders do not require the submission of a FAFSA (Free Application for Federal Student Aid). Their application and its processing may (emphasize, “may”) be somewhat easier and simpler than with Federal student loans.
• A private student loan will typically have a higher interest rate than comparable Federal financing. Private lenders must build in reasonable profit and they tend to have a higher “cost of funds” necessary to make loans.
• There is no opportunity to receive a “subsidized” loan. A subsidized loan means that the Federal government will pay the interest that is due while the student is in school and the loan repayment is deferred. Private student loan companies cannot offer this feature, for obvious reasons.
• Often a new private student loan has fees that are not charged by Federal financing lenders.
• Repayment terms may not be as "flexible" as Federal student loans. New private student loans often offer fewer options for longer repayment periods.

Private student loans are an excellent alternative when Federal financing falls short in completing the puzzle of education cost requirements. You might pay a bit more, but you can borrow more and have more control over the use of your borrowed funds.