Have you decided to return to school? Investing in yourself is money well-spent, as it can lead to personal growth and the potential to increase your income with honed skills and new degrees. But how do you plan to finance it?
The way you choose to fund your education can either help you toward your goal or hamper it. Hereâs how to choose between federal student loans and private student loans by asking yourself some simple questions.
What are federal vs. private student loans?
When it comes to financing your education, youâve got two options for borrowing, broadly speaking: federal student loans and private student loans. Letâs quickly define each.
Federal student loans
Federal student loans are government-funded loans issued by the U.S. Department of Education. Theyâre standardized in terms of borrowing amount, interest rates, and protections (weâll cover those in a minute).
In lieu of a credit check as required for most loans, youâll open a federal student loan by filling out a Free Application for Federal Student Aid (FAFSA). This makes federal student loans very accessible, as even those with bad or thin credit can be approved. The one exception is PLUS loans, which are for parents and graduate/professional students and which do require a credit check.
Only Title IV-eligible institutions qualify for federal student aid. That is, your school must be both accredited and approved to accept federal aid. Most universities and colleges are, but youâll find that overseas schools, bootcamps, or nonaccredited certificate programs wonât qualify.
Private student loans
Private student loans are not issued by the U.S. Department of Education. Instead, theyâre offered by institutions that require a credit score from applicants for approvalâsuch as a bank or online lender. Theyâre helpful for those who either need more money than they can get from a federal student loan or are pursuing an education at an institution that doesnât qualify for federal aid (such as an unaccredited college).
Private student loans donât come with the same standardized terms as a federal student loan; their interest rates vary, as do their hardship programs.
Pros and cons of federal student loans
Pros
- Low fixed interest rates
- No credit check required for most loans
- Typically more robust hardship plans than private student loans
Cons
- Borrowing caps may be insufficient for your needs
- Origination fees
- Covers fewer school types than private student loans
Pros and cons of private student loans
Pros
- Fund the aspects of your schooling that scholarships and grants donât cover
- More flexible repayment structure (term length, fixed vs variable APR)
- Potentially larger borrowing amount than what a federal student loan offers
Cons
- Fewer safety nets than a federal student loan
- Typically requires good credit (or a cosigner)
- Generally higher interest rates than federal student loans
How to decide between federal and private student loans
If youâre unsure which type of student loan will best suit your education goals, ask yourself the following questions.
Have you already opened a federal loan?
Generally speaking, a federal loan should be your first choice when looking to finance your higher education. Again, thereâs a lot to likeâfrom lower maximum interest rates than (most) private student loans to guaranteed income-driven repayment options.
If you havenât tapped your federal student loan options, or if you qualify for more federal funding, itâs typically best to go that route. If youâve already maxed out your available federal student loans and you need more funding to cover all your expenses, a private student loan could be the perfect way to supplement.
Whatâs your credit score?
Private student loans require a credit check. Federal student loans do not. There are pros and cons to each.
If your credit score lives in the basementâor if youâve got limited credit historyâyou may not qualify for a private student loan unless youâve got a cosigner with a more impressive credit profile. And the best rates are reserved for those deemed most creditworthy.
If neither you nor your cosigner have excellent credit scores, or if other common factors leave a lot to be desired (think high debt-to-income ratio, insufficient income, or a record of unsteady employment), you may find yourself paying interest far above what you could get with a federal student loan. If, however, you are able to qualify for the best rates, you might potentially pay less than if you had opened a federal student loan.
How important are hardship programs to you?
Because federal student loans are required to come with certain safety nets in the event of hardship, they can be a less risky proposition than private student loans. Youâll get options like:
- Forbearance:Â Temporarily pause or reduce monthly payments
- Deferment: Postpone your payments (for subsidized loans) without accruing extra interest in eligible circumstancesâsuch as returning to school, economic hardship, unemployment, etc.
- Income-driven repayment:Â Monthly payment is directly proportional to your discretionary income
While federal student loans are the only type of student loans that standardize these programs, you may also find private student loans that offer them. Just note that theyâre not guaranteed.
Does your school accept federal financial aid?
You canât pay for just any school with federal financial aid. Federal student loans can only be used at Title IV-eligible institutions, meaning accredited schools that have been approved by the Department of Education to qualify for federal aid. If you plan to pay for a coding bootcamp or an unaccredited vocational school, for example, federal aid wonât help you.
Private student loans tend to be more lenient when it comes to where you go to school. Each lender has its own rules, but itâs possible to find a private student loan that covers much more than just Title IV-eligible schools.
The takeaway
Your best course of action is to enroll in federal student loans first and save private student loans as a supplement if your education exceeds your federal maximum borrowing limit. The exception is if youâre pursuing a degree at an unaccredited institution that doesnât qualify for federal aid.
Frequently asked questions
Can you convert private student loans to federal loans?
You cannot convert private student loans into federal student loans. However, you can convert federal student loans into private student loans by refinancing.
What credit score do you need for a private student loan?
You wonât find a hard credit score requirement across all lenders. However, youâll often need at least a âgoodâ credit score to qualify (670 or above, per FICO).
Do federal student loans require a credit check?
Most federal student loans do not require a credit check. They instead require that you fill out a FAFSA form detailing your financial information. This helps the government to decide how much aid you qualify for.
Can you have both federal and private student loans at the same time?
Yes, you can have both federal and private student loans at the same time. This is common, as private student loans are often used to supplement federal student loans when more funding is required.
Can private student loans be forgiven?
Private student loans donât come with the same protections such as forgiveness and income-driven repayment that you can find with federal student loans. Youâd typically have to file for bankruptcy to have your private student loans wiped away.
This story was originally featured on Fortune.com