Student Loans 101

federal vs private student loans

Paying for School: Student Loans 101

Federal vs. private student loans

Many students jump into student loan debt without a real understanding of what lies ahead.

  • Federal student loans: These loans are government-funded
  • Private student loans: These loans can come from banks, credit unions, schools or other private institutions

A look at the differences

How is interest charged?

  • Federal: The interest rate for federal student loans is set by Congress. It’s a fixed rate that’s often lower than private loan rates. Fixed rates also tend to be easier to budget for because they stay the same over time.
  • Private: The interest rate for private student loans varies from lender to lender. They’re often variable-rate loans, which makes them unpredictable and potentially more expensive over time.

Are the loans subsidized?

  • Federal: Certain federal student loans, such as the Perkins Loan, are government-subsidized. This means that the government pays the interest on your loan while you’re in school and for a grace period—usually six months—after graduation.
  • Private: Private student loans are not subsidized, so interest starts accumulating from day one and you’re responsible for paying it—even while you’re a student.

What are the eligibility requirements?

  • Federal: There is a range of federal student loans available, and they all have their own eligibility requirements. Some of the criteria are very basic, like being a full-time student and maintaining good grades. Other loans are only available based on financial need.
  • Private: Although private lenders don’t tend to factor in financial need, they may have other requirements similar to those associated with regular personal loans. You may need to have a good credit score, for instance, or have a parent co-signer.

What are the repayment options?

  • Federal: Federal student loans generally provide more flexible repayment options than private student loans. Options include standard fixed payment plans, graduated payment plans where your payments increase over time as you build your career, and income-based payment plans. Federal loans are also easier to consolidate.
  • Private: Private lenders tend to be more rigid when it comes to repayment, and private student loans can be trickier to consolidate.

In addition, be sure to compare other factors including loan fees, tax deductions, spending restrictions, prepayment penalties and borrowing limits. No matter how you choose to finance your education, fully understand what you are signing and borrow only what you absolutely need.

Sources: Federal Student Aid,, Investopedia,

5 Ways to Lower the Cost of Tuition Before Considering a Student Loan

If you’re considering financing your college education with the help of a student loan, the smartest thing you can do for yourself is to only borrow what you truly need. (This advice applies to pretty much all loan products, by the way.) Pursuing post-secondary education should be an exciting time in your life. You’re making decisions and opening up possibilities that will shape your future—a future that is adventurous and fulfilling and that decidedly does not include years and years of crippling debt.

For many young adults, student loans serve as the first real experience with borrowing a large amount of money. It’s a steep learning curve for someone just starting out, and not understanding financial concepts like interest rates, loan terms and repayment schedules can quickly snowball into a very stressful and costly post-graduation experience.

Although there are things you can do during your time as a student to soften the sting of student loan repayment (working part-time while in school and sharpening those budgeting skills are two solid strategies), why not get the process started even sooner? The following tips will take a bite out of your total education costs and reduce your dependence on outside financing—and they can all be put into action long before Orientation Day rolls around.

1) Do the Two-Step

(No, we’re not referring to the dance.) The college two-step means splitting your studies between two schools. You start by attending a more affordable institution for your general education courses, and then transfer to your school of choice to complete your degree (one example of this in practice is earning an associate’s degree at a community college and then transferring into a bachelor’s degree program at a university). This way, you save some money on introductory-level courses and reserve the big bucks for the specialized instruction that comes in the latter half of your academic career.

2) Go for Extra Credit

Find out if there are any opportunities to earn college credits while still in high school. Beyond reducing college tuition costs, advanced college credit programs are an excellent way to explore your interests more seriously and to get a sneak preview of what your college workload will look like. If you’re already out of high school, find out if any colleges or universities in your area offer summer courses at reduced tuition—that could be an alternative way to score some credits before September.

3) Seek Out Scholarships

Apply for every form of scholarship, grant and tuition waiver that you’re eligible for. It’s never too early to start your scholarship search—reach out to your high school guidance counselor or the financial aid coordinator at the college you wish to attend. Visit scholarship search engines and online resources. Reach out to your current employer and your family members—you never know, there may be some form of tuition subsidy or grant opportunity available to you through an employer or alumni network. Be exhaustive in your search and approach each application with the same level of enthusiasm and optimism—even the smallest awards and prizes will add up. It’s free money, and it’s there for the taking.

4) Location Scout

Geography can play a significant role in determining your total education costs. A single school may have different tuition rates for in-state, out-of-state and international students. Generally speaking, staying in-state is usually the most affordable option—in addition to saving on tuition, you can also sidestep some of the larger expenses associated with studying abroad (like travel costs, meal plans and living in residence). Of course, there are plenty of non-financial incentives for studying abroad, but it’s important to understand just how much the location of your school will affect your bottom line.

5) Double Down

Some schools offer accelerated programs that enable you to complete a four-year degree in just three years. This is a great option to consider—that’s one less year of tuition to pay!—but bear in mind that you’ll be squeezing more classes into a shorter period of time. The intensive schedule might make it difficult to accommodate a job while you’re in school, for example, so weigh your options carefully before committing to a more ambitious schedule. 

The tips outlined above represent thousands of dollars of potential savings. Whether you’re a first-time student or a returning student, it’s in your absolute best interest to whittle down your education costs as much as possible before considering a student loan or alternative financing option. Your future self will thank you.