College students often use a combination of funding including grants, scholarships, student loans, and savings to pay for their college education. Scholarships and grants are helpful because they typically don’t have to be repaid. But in many cases, students rely on borrowed funds to help pay for some college costs.
Student borrowers have two major options available to them — private and federal student loans. While both types can be used by students to help pay for college there are big differences in how a student will apply for them. Continue reading for more details on the differences between private and federal student loans and their application process.
Federal Student Loans vs Private Student Loans
Federal student loans are provided by the federal government. Private student loans are issued by institutions such as banks, some schools, and other private lenders. In order to make an educated borrowing decision it’s important to understand the major differences between federal vs private student loans. These differences include:
Repayment Terms
Federal student loans have a standardized set of repayment options. Borrowers can choose any of the federal plans and can adjust their repayment plan at any time without incurring any costs by contacting their loan servicer.
These repayments include income-driven repayment options which aim to make repaying student loans more affordable by linking monthly payments to your income.
The repayment terms on private student loans are set by the lender at the time the loan is borrowed. Some lenders may offer flexible repayment terms, but they are not required to do so. Thoroughly review the loan terms before borrowing.
Interest Rates
All federal student loans have fixed interest rates, which are determined annually by Congress.
Private student loans may have either fixed or variable interest rates. With variable rates, the starting rate depends on factors such as your credit score, income, and employment history, and it can change as the economy fluctuates. Lenders determine the interest rate on a loan based on reviewing borrower information such as income, credit history and score, among other factors.
In-School Deferment Options
Your choice between federal and private student loans may also determine when you start paying back your loans.
If you have a federal student loan, you generally aren’t required to start making payments until you graduate, leave college altogether, or reduce your course load below half-time. Many federal loans offer a six-month grace period after you leave school or cut back to below half-time, meaning you don’t have to make student loan payments during this time.
Certain private lenders allow you to wait to make payments on your private student loans just as you would with federal loans, but others require you to start paying them while you’re still in school full-time. This varies depending on the lender, so it’s important to check the specifics before taking out a loan.
Recommended: Using In-School Deferment as a Student
Which Type of Student Loan Should You Apply for First?
Federal student loans tend to be more flexible in regards to repayment options and loan forgiveness, and sometimes offer lower interest rates than private student loans. Because private loans are awarded based on borrower criteria including credit history, undergraduate students with limited credit history may need to add a cosigner to strengthen their chances of being approved for a private student loan.
Generally speaking, federal loans are prioritized over private student loans. But, in situations where borrowers have exhausted their federal borrowing options, private student loans can help fill financing gaps.
How Does the Application Process Differ Between Federal and Private Student Loans?
We’ll dive into an overview of how to apply for student loans, broken down by federal and private loans. But you should know that there are two main differences in the processes: where to apply and when to apply.
Federal Student Loan Deadlines
For federal student loans, you’ll fill out the Free Application for Federal Student Aid, better known as the FAFSA®. You will need to fill out the FAFSA each year you are in school.
When it comes to timing, there are important FAFSA deadlines set by the state and sometimes your individual college. Some states offer aid on a first-come, first-served basis, so procrastinating may not be in your best interest. Jumping on the FAFSA® early could make a difference in how much aid you receive.
Private Student Loan Deadlines
To apply for a private student loan, you’ll fill out an application directly with an individual lender. While private student loans are known for being more stringent with their terms and requirements, they can actually be more flexible when it comes to application timing. There’s no universal private student loan deadline. That’s one reason you may prefer to apply for federal student loans before private ones—to see how much federal financial aid you receive first, then, if needed, you can fill in the gaps with private loans.
Recommended: When to Apply for Student Loans: Student Loan Deadlines
Applying for Federal Student Loans
To apply for federal student loans, the first step is to fill out the FAFSA.
Filling out the FAFSA
You can fill out the FAFSA online at the Student Aid website. You can list up to 10 colleges on your FAFSA® form. If you want to list more than 10, you just have to follow a couple of extra steps.
The FAFSA form will ask for personal and financial information about the student and their parents (if the student is a dependent). These questions cover your age, marital status, level of degree you’re acquiring, military status, and your own dependents.
You’ll provide the necessary financial information. This includes your federal income tax returns and tax documents (and/or your parents’ returns and documents, if you’re considered a dependent). This may sound like a lot of work, but the website makes it relatively easy. It includes an IRS Data Retrieval Tool, and once you enter the relevant information, it should be able to pull up you and/or your parent’s tax return(s).
Just a heads up — you won’t submit the most recent tax return. For example, if you’re applying for aid for the 2023-24 school year, you’ll attach your 2021 tax returns.
If you have any untaxed income from that particular calendar year (the year 2021 from our example), you’ll need to provide records for those earnings. If you’re a dependent, this could include your parent’s income, including sources like child support or disability benefits.
Last but not least, you and/or your parents will provide bank statements. These statements should be current at the time you fill out the application, not from the year of the tax documents and untaxed income reports you submitted.
Recommended: SoFi’s FAFSA Guide
Completing FAFSA Follow-up Steps
After receiving your Student Aid Report, you may want to double-check with the schools you listed on the FAFSA® to make sure they received your information and to ask if they need you to fill out any more documents. Some schools require different documents, so it may be beneficial to contact each one.
Once a school has processed your information, you’ll receive an award letter from the institution that officially reports how much aid you’ll be receiving. Colleges differ in how long they wait to send out award letters, so if you’re feeling antsy, you can call to inquire about their reward deadline.
Now for a huge follow-up step: applying for private student loans if scholarships, grants, and federal loans don’t cover everything.
Types of Federal Student Loans
There are four types of federal student loans: Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans for graduate and professional students, and Direct PLUS Loans for parents.
Direct Subsidized vs Unsubsidized Loans
Direct Subsidized Loans are available for undergraduate students. These loans are for students in financial need, and you don’t have to pay the interest until six months after you’ve graduated, left school, or dropped below half-time enrollment. These six months are referred to as the “grace period.” Interest will still accrue while you’re in school, but the government covers interest while you’re enrolled and during the grace period.
Direct Unsubsidized Loans are also for undergraduate students, but they aren’t disbursed based on your financial situation. The government doesn’t cover the cost of interest while you’re in school, so interest will accumulate throughout your time in college. You have the option to pay off the interest while you’re still a student, or you can wait until you start repaying your loans after the grace period—just keep in mind that unlike with Subsidized Loans, you’re responsible for paying the interest from this time period, not the government.
Direct PLUS Loans
The third type of federal student loan is a Direct PLUS Loan for graduate or professional students. The student takes out the loan, which is unsubsidized.
The fourth type is the Direct PLUS Loan for parents. This loan is for the parents of undergraduate students, so the parents would apply for and are held responsible for paying back the loan. Parent PLUS Loans are also unsubsidized.
Direct PLUS Loans require a credit check, unlike Direct Subsidized and Unsubsidized Loans.
Applying for Private Student Loans
As mentioned above, you can typically apply for private student loans directly on the lenders’ websites. If you’re having trouble deciding where to apply for private loans but have already narrowed down your top schools, you can contact those institutions. Some colleges have “preferred lender” lists.
However, you aren’t necessarily bound by those lender lists. You may still want to research private student loans to find the right interest rates, interest rate types (fixed or variable), payment schedules, and included fees for your specific needs. Remember, private student loans tend to vary in their terms, so a little research can’t hurt.
Lender Requirements
Make sure you meet the requirements to receive a private student loan. For example, will you be enrolled in school at least half-time?
You should also make sure you’re attending a school that’s eligible for private student loans. If you’re attending a community college or trade school, you may or may not be able to receive a private loan.
Keep in mind that private student loan lenders tend to check things like your credit, income, and job history when you apply. This step will affect everyone differently, but if you’re fresh out of high school, this step could throw you for a loop. What if you’ve never had a job? What if you didn’t even know credit scores were a thing before this moment?
Considering a Cosigner
One thing that may help in this predicament is finding a student loan cosigner.
Your options for a cosigner are fairly flexible, but many borrowers choose someone they trust, such as a parent, close relative, or trusted friend.
Cosigners can also come in handy if you aren’t a U.S. citizen. Maybe someone from your host family or study abroad program can cosign for you.
Still, it may be possible to get a private loan without a cosigner if you have low credit and/or income. Just be prepared to possibly pay more in interest!
Other Ways to Finance Your Education
Yes, federal and private student loans are tools for receiving money to pay for college. But they aren’t the only options! Remember, you can always apply for scholarships and grants.
Scholarships and Grants
Scholarships are “gift aid,” which means they don’t usually need to be repaid, and are typically merit-based. You can search for scholarships based on skill, such as academic, athletic, or music scholarships.
There are also scholarships available for people of certain demographics, such as ones for minorities or for women. You could even find scholarships for people of a certain religion/denomination or for those who’ve engaged in community service.
Grants are gift aid awarded based on your financial need. Some grants are provided by the government (state or federal), while others may be offered by your school or a private company.
Work-Study Program
The federal work-study program awards students with financial need the option to work part-time jobs to help pay for college. If you are interested in participating in the work-study program, you can indicate your interest when you fill out the FAFSA.
If you do not qualify for work-study, you may consider getting a part-time job.
The Takeaway
To apply for a federal student loan, and other forms of federal financial aid, students will fill out the FAFSA annually. Students interested in private student loans will fill out applications directly with private lenders.
Private student loans can be a tool when all other forms of aid have been exhausted. But if scholarships, grants, and federal student loans don’t cover your cost of attendance, finding a suitable private student loan could be the final step to supplementing your education costs. SoFi offers fee-free private student loans with competitive interest rates for qualifying borrowers. Plus, SoFi members can access even more benefits like career coaching.
Ready to get started? SoFi offers private undergraduate, graduate, and parent student loans, and student loan refinancing with flexible repayment options.
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