Within the realm of student financial aid, it can be divided into two categories: federal (public) and state (private). The difference between the two is where they come from and the variety of benefits they each offer. However, both are great options and can be used by people of all backgrounds in need of financial support.
Federal Loans
When applying for loans from institutions, there are both federal student loans (FSL) and federal parent loans (FPL), which are both government funded. Starting with federal loans when working to reduce student debt is more affordable and convenient than state loans, as they provide students and parents assorted options to work with. To do so, one must complete a Free Application for Federal Student Aid (FAFSA) form.
These are created by the government, and uphold a certain set of laws and benefits, such as fixed interest rates and income-driven repayment plans. Students can use either Direct Subsidized Loans/Direct Unsubsidized Loans or Direct PLUS Loans. Direct Subsidized Loans have the interest charge covered by the government while one is in school. Direct PLUS Loans are typically designed for graduate and professional students. Parents can use Direct PLUS Loans (parent edition) as a payment method, but they are fully responsible for it.
In terms of how payment works with expenses and time management, FSLs are not required to be immediately paid off. A student has until after they graduate, leave the school, or change their enrollment status to halftime. If a conflict should occur in repaying a loan, one can temporarily postpone their payments or lower them. However, there is no penalty fee for prepayment. If working with an FPL, these benefits still apply to the parent who is paying these loans. The payment made within these ranges often has an interest rate typically lower than credit card and private loan rates. Forgiveness of these loans can also be a possibility for those who work in public service.
As for a deeper financial aspect, FSLs do not require a credit check, while FPLs do require a credit check for eligibility. FPLs are also not subsidized, indicating that the parent is fully responsible for paying all the interest within the loans. Both FSLs and FPLs for monthly payments can be tied to one’s earned income.
State Loans
When applying for private loans from the state, money is typically borrowed from private organizations including banks, credit unions, and state-based/state-affiliated organizations. All terms and conditions in relation to the loan are set by the specific lender and are more expensive than federal loans. However, borrowers have a higher borrowing limit over those using federal loans.
Within private loans, there are distinct types depending on the lender and what one is paying for, meaning not all private loans work the same. Institutions will ask that all loans be paid off while the student is still in school but select schools will allow payments to be put off until after graduation. Lenders may or may not be flexible when the borrower is looking to lower/postpone the payment, and there should be no prepayment penalty fees. In the opposite case where one is struggling with payment, many private lenders will not offer loan forgiveness. To combat this, people can reach out to certain state agencies for student loan forgiveness in certain circumstances.
Like FSLs and FPLs, private loans have a potential tax-deductible interest rate, but it could be higher or lower than that of a federal loan, depending on the specific case. They also cannot be consolidated into a Direct Consolidation Loan like FSLs and FPLs, but they may be refinanced. Since private loans have this ability, they are not subsidized, meaning the borrower is responsible for paying off all interest within the loan. To get this kind of loan, a proven credit record or cosigner is required.
Advice
It is important to remember that private loans are not based on financial need, whereas federal loans are. Recognizing which loans one will be working with is key to ensuring a good management plan is established to help pay them off. To help, reaching out to financial advisors and trusted resources is a great way to get a stronger understanding of how these loans can be handled.
Sources
Comments