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Need to Know about Student Loan Debt - Federal vs Private Loans

Need to Know about Student Loan Debt - Federal vs Private Loans

May 22, 2024

Federal vs. Private Student Loans – What Student Borrows Need to Know 

by Mark Miller, CFP©, APMA©

with Jayne W. Di Vincenzo, CFP©, ChFC©, CEP©, AIF©


Federal student loans are funded by the U.S. government, which lends money directly to students.  The government establishes the terms and conditions of the loans through legislative approval with features, including: 

  • Fixed interest rates set by Congress annually; 
  • Income-based repayment options; 
  • Deferments, which allow borrowers to stop making payments if they are experiencing a financial hardship; and 
  • Potentially loan forgiveness. 

While the government directly lends money to students, federal student loan servicers are companies contracted by the government to handle administrative tasks. To become eligible for these loans, students must complete the Free Application for Student Aid (FAFSA). Because of the flexibility of federal loans, students should start here before applying for loans elsewhere.   

Private student loans are offered by banks and institutions such as Sallie Mae, College Avenue and Ascent. These lenders base loan terms on credit history, income and debt, and possibly future employment prospects of the applicants.   

At a minimum, private student loan borrowers should know the answers to these questions: 

  • What is the Annual Percentage Rate (APR) of my loan? 
  • Is the rate fixed or variable, and if it's variable, how is the rate calculated? 
  • When does interest start accruing? 
  • When do I start repaying my loan, and how long is the loan term? 
  • When would I be considered in default if I cannot make a payment?   
  • May I temporarily suspend payments if I'm experiencing a financial hardship? 

Students would be wise to shop around and make sure they understand all of the loan terms. For example, one loan may offer a lower interest rate, but it may not allow for any grace periods or deferment options, or it may require immediate repayment.  Know before you owe! 

Also, many borrowers -- public and private -- have more than one loan, so they should educate themselves about refinancing and loan consolidation. The federal loan program doesn't allow refinancing, but borrowers can consolidate their loans. Keep in mind that consolidation will not result in a lower interest rate. A consolidated loan will have a weighted average interest rate of all the existing loans. What's more, students can't consolidate private loans and federal loans. Students with private loans should check with their servicers to make sure that refinancing and consolidation benefits them. 

Finally, if shopping for student loans among multiple lenders, make sure to submit all your applications within 30 days of each other to minimize impact of inquiries on your credit report. 


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