Understanding these two types of loans can help you make the best choices for you.

So you got into college. Congrats! Now you need to figure out how you’ll pay for it. While yes, tuition, room and board, books, and other fees can add up to a lot, most students use a variety of sources to fund their education, including family help, savings, scholarships, work-study jobs, grants, and student loans. When it comes to loans, you might decide to take out federal student loans, private student loans, or a combination of the two.

First, let’s cover some student loan basics. Knowing a few common terms used to describe student loans can help clarify things, and also make the whole subject seem a little less intimidating.

  • Federal Direct subsidized vs. unsubsidized loans: Direct subsidized loans are loans given by the government based on financial need. The government pays the interest on them while you’re in school at least half-time, during the grace period, and during a deferment. With unsubsidized loans, you’re responsible for paying the interest that accumulates during those times.
  • Interest and interest rates: Interest is what you pay to borrow money. Interest rates tell you how much it costs you to do so, and are a percentage of the loan amount.
  • Fixed vs. variable interest rates: A fixed interest rate won’t change during the life of the loan. Variable interest rates fluctuate based on market indexes. Fixed rates are usually lower but can go up during the term of the loan, which means your minimum payments will fluctuate as well. All federal loans have fixed interest rates. Private student loans often let you choose between a fixed or variable rate.
  • Grace period: A period of time after you graduate during which you don’t need to make loan payments. When the grace period ends, you have to start making payments of principal and interest.
  • Cosigner: This is an adult (most often a parent) who accepts responsibility for the loan repayment with you. If you do not have an established credit history to qualify for a private student loan on your own, you may have the option to apply with a creditworthy cosigner. Adding a creditworthy cosigner can help improve your likelihood for loan approval and you may receive a lower rate.

Comparing Federal and Private Undergraduate Loans

  Federal Private
Lender Government A financial institution like a bank or credit union
Subsidized? Sometimes, based on financial need No
Interest rates Fixed rates are determined July 1 Fixed or variable, with rates varying depending on the lender, as well as the borrower’s (and/or cosigner’s) credit
Maximum amount loaned For Direct Subsidized and Unsubsidized Loans, between $5,500 and $12,500 per year for undergraduate students Varies from lender to lender, but generally covers the cost of education minus other financial aid. Aggregate loan limits may apply
Origination fee Yes Depends on the lender, but many do not charge one
Repayment options Choose from seven different options, visit studentaid.gov for details Depends on the lender, may be more limited than federal loan options
FAFSA® required? Yes No

All about federal student loans

Like the name suggests, federal student loans are made to you by the federal government. If you’re a student borrowing for undergrad, they come in two varieties: subsidized loans (which are based on financial need) and unsubsidized loans. The main difference is that with a subsidized loan, the government pays the interest that accrues during school and through the grace period, while with unsubsidized loans, you’re responsible for paying that interest. (And if you don’t pay it before the grace period ends, it gets capitalized, which means it is added to the principal or base amount of your loan.) Interest rates on federal loans are fixed. However, there’s a cap on how much you can borrow each year. After graduation, you can choose from a variety of different repayment plans. And if you work in certain jobs or fields, there is the possibility of having your loans forgiven (i.e. wiped out) after a period of time of making payments.

To apply for a federal loan, you must fill out the Free Application for Federal Student Aid (FAFSA®). The application is available on October 1st each year.

The benefits of private student loans

While the government issues federal student loans, private student loans are made by financial institutions like banks or credit unions. And while federal loan terms are standardized, the terms of a private student loan will vary from lender to lender. 

Interest rates on a private student loan can be higher or lower than rates on federal loans based on your creditworthiness and/or the creditworthiness of your cosigner, and that interest rate can be fixed or variable. Repayment assistance options vary by lender, so if you have a private loan and can’t make your payments, check to see what options are available. And with very few exceptions, private student loans generally don’t have loan forgiveness options.

To apply for a private student loan, submit an application directly with a specific lender.

Getting a private student loan

Private student loans can be a good option to bridge the gap between federal student loans and total college costs. Discover® Undergraduate Student Loans offer great rates and zero fees. You can also earn cash rewards for good grades, and get an interest rate reduction while enrolled in automatic payments

FAFSA® is a registered trademark of the US Department of Education and is not affiliated with Discover® Student Loans

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