Families have several options for financing college costs, including federal student loans, federal parent loans, private student loans and private parent loans. Most borrowers should look to federal loan programs first, as they typically have more favorable terms than those available from private lenders.

The federal government provides student loans and parent loans through the Federal Direct Stafford and Federal Direct PLUS loan programs. The specifics of these programs are determined by law.

Private student loans and parent loans are made by banks, credit unions and other financial institutions, as well as state loan agencies. Each sets the terms of their loan programs. Private loan programs are designed to be profitable for the lender (except loans provided by state loan agencies), with loan eligibility and the cost of borrowing tied to the borrower’s creditworthiness.

Loan Eligibility

Private student loans have more stringent credit requirements than federal loans. Federal loans are available to most borrowers regardless of their credit.

  • Federal Stafford Loans do not require a credit check. These loans are available to all students, even if they have bad credit.
  • Federal PLUS Loans do require a review of the borrower’s credit history. However, borrowers are denied a PLUS Loan only if they are found to have an adverse credit history. Generally, if a borrower has repaid their debts over the past five years, they can receive a Federal PLUS loan despite a low credit score.
  • Private loans require a detailed review of the borrower’s creditworthiness. This review examines credit scores, credit history, the debt-to-income ratio, employment history, and secondary criteria such as prestige of school, grades, progress toward a degree, and academic major.

Most students do not have sufficient credit to obtain a private student loan on their own, so a creditworthy cosigner is often required. The cosigner accepts joint responsibility with the borrower for repayment of the student loan. Cosigners are not required for Federal Stafford Loans, and are required for Federal PLUS Loans only if the borrower was denied a loan on their own due to an adverse credit history.

Federal loans require the student to be enrolled on at least a half-time basis.

 

Federal Direct Stafford

Federal Direct PLUS

Private Loans

Lender

Federal Government

Federal Government

Banks, credit unions, other financial institutions, and state loan agencies

Borrower

Student

Graduate and professional school students, parents of undergraduate students

Students and parents

Enrollment Status

At least half-time

At least half-time

Varies

School Certification

Yes

Yes

Yes (mostly)

Cosigner Required

No

Rarely

Usually

Defense of Infancy

No

No

Yes, typically requires borrower to be 18, 19 or 21, depending on the state

FAFSA Required

Yes

Yes

No

Credit Check

No

Adverse credit history only

Full credit underwriting, including credit scores and debt-to-income ratios

Borrowing Limits

The maximum amount that can be borrowed each year from all federal and private student loan programs is generally based on the college’s cost of attendance less other financial aid received. Federal Stafford Loans and a limited number of private loans have specific annual dollar limits.

Federal Stafford Loans have annual borrowing limits that vary by degree level, year in school (for undergraduate students), and whether an undergraduate student is a dependent. The limits range from $5,500 to $7,500 for dependent undergraduate students and $9,500 to $12,500 for independent undergraduate students. Most graduate students can borrow up to $20,500, with a higher limit of $40,500 for graduate students pursuing qualified health professions.

Federal PLUS Loan amounts are limited to the cost of attendance less other financial aid received.

Annual limits for private loans usually are similar to those for Federal PLUS Loans, but may be lower for some lenders.

Aggregate borrowing limits for Federal Stafford Loans are $31,000 for dependent undergraduate students, $57,500 for independent undergraduate students, $138,500 for graduate students (including undergraduate debt) and $224,000 for graduate students pursuing qualified health professions.

Federal PLUS Loans do not have an aggregate limit.

Private lenders typically cap aggregate student loan debt at $150,000, with higher limits for students pursuing an MBA, law degree, or certain health professions.

 

Federal Direct Stafford

Federal Direct PLUS

Private Loans

Annual Loan Limits

$5,500 to $7,500 dependent undergraduate students

$9,500 to $12,500 independent undergraduate students

$20,500 graduate students

$40,500 health professions

Cost of attendance minus other aid

Usually cost of attendance minus other aid, some have lower limits

Aggregate Loan Limits

$31,000 dependent undergraduate students

$57,500 independent undergraduate students

$138,500 graduate students

$224,000 health professions

No limit

Typically up to $150,000 including federal loans, higher for certain professional degrees

Cost of Borrowing

The total cost of borrowing, including total interest paid and loan fees, is often lower for federal student loans than for private loan alternatives.

The interest rates on federal student loans do not depend on the borrower’s credit and are the same for all borrowers in a program category. The interest rate margins applied to federal loans are usually lower than what a borrower can obtain from private lenders unless they fall into a lender’s top credit tier. However, federal loans do have origination fees — about 1% for Federal Stafford Loans and 4% for Federal PLUS Loans, while private lenders don’t typically assess any loan fees (at least not explicitly).

All federal loans carry fixed interest rates for the life of the loan, while private loan borrowers usually have the option of choosing between a fixed interest rate and a variable interest rate. Variable interest rates typically start out lower than the lender’s fixed-rate alternative on loans with the same payment terms.

Most student loans do not require repayment while the student is enrolled at least half-time and during the six-month grace period after enrollment ends. However, interest begins accruing for unsubsidized Federal Stafford Loans, Federal PLUS Loans, and private loans after the loan proceeds are disbursed.

Undergraduate student loan borrowers that qualify for subsidized Federal Stafford Loans are not charged interest on the subsidized loan amount during the in-school and grace periods. Interest also is not charged during authorized deferments, such as the economic hardship deferment.

For federal loans, unpaid interest is capitalized when repayment begins or when payment resumes following deferment (on unsubsidized loans), forbearance, or when a borrower leaves an income-driven repayment plan in which the monthly payment was less than the new interest that accrued.

Unpaid interest on private student loans is also usually capitalized at loan status changes, such as when repayment begins or resumes after forbearance. But, some loans may capitalize interest as often as monthly, quarterly, or annually before repayment begins.

 

Federal Direct Stafford

Federal Direct PLUS

Private Loans

Interest Rates

Fixed, same for all borrowers

Fixed, same for all borrowers

Fixed and variable, based on credit scores of borrower and cosigner

Loan Fees

About 1%

About 4%

Usually zero

Subsidized Interest Benefits

Yes, for undergraduate student borrowers with demonstrated financial need

No

No

Interest Capitalization

At loan status changes

At loan status changes

Monthly, quarterly, annually or at loan status changes

Student Loan Interest Deduction

Yes

Yes

Yes

Loan Repayment

Federal student loans offer more repayment options than private student loans, but private loans offer more choices for in-school payments. Borrowers must choose the payment terms for a private loan when the promissory note is signed, but have the flexibility to choose the payment schedule for federal loans when repayment begins.

Federal student loans offer repayment terms from 10 to 30 years. Private student loan repayment terms typically range from 5 to 25 years, with most lenders offering 5, 10 or 15-year options.

Federal loans offer a variety of repayment schedules. In addition to standard and extended repayment with level payments, borrowers can opt for graduated repayment with increasing monthly payments over time, or choose from one of several income-driven repayment options.

However, Federal Parent PLUS Loan borrowers are only eligible for one income-driven repayment plan — the Income-Contingent Repayment Plan (ICR). And this option is only available if they first consolidate their Parent PLUS Loans into a Federal Direct Consolidation Loan.

Most private loans have level amortization schedules and do not offer income-based repayment.

Federal Stafford Loans do not offer in-school payment options, while Federal PLUS Loans enter repayment within 60 days after the loan is fully disbursed unless the borrower elects to defer the loan while the student is enrolled on at least a half-time basis and during a six month grace period.

Private student loans usually allow as many as four different options for in-school payment:

  • Full deferment of payment during in-school and grace periods
  • Immediate repayment
  • Interest-only payment
  • Fixed payment

Electing to make some type of in-school payment can help private student loan borrowers limit the amount of capitalized interest and total interest paid over the life of the loan. Some lenders offer interest rate reductions for in-school payments.

Any student or parent borrower with a federal or private loan can send payment in excess of the amount due. Federal law prohibits lenders from assessing prepayment penalties on federal and private student loans.

 

Federal Direct Stafford

Federal Direct PLUS

Private Loans

Repayment Terms

10-30 years

10-30 years

5-25 years

In-School Payment Options

Full deferment

Full deferment or immediate repayment

Full deferment, immediate repayment, interest-only payment, or fixed payment

Prepayment Penalties

No

No

No

Income-Driven Repayment

Yes

Usually, limitation for Federal Parent PLUS

No

Loan Consolidation and Refinancing

Yes

Yes

Yes

Statute of Limitations

No

No

Yes, typically 6 years

Forbearance, Forgiveness and Discharge

Borrowers may be able to obtain forbearance for their student loans to allow them to temporarily reduce or postpone payments. Forbearance limits for federal loans are 3 years while private lenders usually enforce a 1-year limit.

Borrowers with federal student loans may apply for loan forgiveness. In addition to the Teacher Loan Forgiveness Program, the federal government sponsors the Public Service Loan Forgiveness Program, which allows borrowers to apply for loan forgiveness if they:

  • Work full-time for a government or non-profit organization
  • Repay their Federal Direct loans in an income-driven repayment plan
  • Make 120 qualifying payments

Loan forgiveness is generally not available for private student loans. However, private loan borrowers may be eligible for repayment assistance through grant programs sponsored by state or local governments.

Federal student loans are discharged due to death or total disability of the student. And Federal Parent PLUS Loans are discharged if the parent or student dies. Federal Parent PLUS Loans are also discharged if the parent becomes totally disabled, but not if the student whom the loan benefits is the one that is disabled.

Most private lenders also discharge student loans due to death or total disability. But, each lender establishes its own criteria for the discharges, such as what types of disabilities qualify for a disability discharge.

 

Federal Direct Stafford

Federal Direct PLUS

Private Loans

Forbearance Limits

3 years

3 years

1 year

Loan Forgiveness

Yes

Yes

No

Death Discharge

Yes

Yes

Varies by lender

Disability Discharge

Yes

Yes

Varies by lender

 

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