Federal vs. Private Student Loans: Cons for each

As a student, it might be difficult to figure out the best ways to pay for college. The FAFSA and grants and scholarships may have already been depleted, therefore you may be looking at student loans to bridge the gap in your financial aid.

Federal student loans and private student loans are the two most common loan types available to borrowers. If you're an undergraduate, your first priority should be to use up all of your federal student loans. The interest rates on these federally guaranteed loans are lower than those of a private lender. You don't need a co-signer to acquire one, and they come with protections against default that private loans do not.

Here is a comparison of federal and private student loans.

What are the cons of private student loans?

There are numerous downsides of private student loans over government loans:

It's more difficult to get approved for private student loans

Most private student loans are dependent on a borrower's credit history. This means that if you don't have a good credit history and a steady income, you won't be able to get a loan. No co-signer is required for federal student loans for undergraduates. However, if the borrower's credit history reflects a negative event like as bankruptcy, foreclosure or loan charge-off in the past, PLUS loans for parents and graduate students may require a co-signer.

Private student loan interest rates are greater than federal student loan interest rates

After July 1, the fixed interest rate on federal student loans is 4.99 percent (though all federal student loans are in a temporary, interest-free forbearance through Sept. 30 as part of coronavirus relief). Private student loan rates will be much higher for the majority of borrowers. Additionally, federally subsidized student loans are available to students in need. Student loans with interest-free grace periods and deferral do not accumulate interest while the borrower is enrolled in school. Until the debt is paid in full, interest on private student loans will continue to accrue.

Private loans have stricter payment policies

A wide variety of deferral and forbearance options, as well as many payment plans, are available for federal student loans. For example, federal borrowers can petition for a three-year economic hardship deferment; a standard 12-month maximum for private student loans. Income-driven repayment options for federal student loans can result in payments as low as $0, although short-term payment arrangements are commonly offered by private lenders for loans.

Most student loan forgiveness programs exclude private student loans from their coverage

Loans from the Federal Government Borrowers must make a certain number of payments before their loan debt is forgiven under forgiveness and income-driven repayment plans. Private student loans, on the other hand, do not include these possibilities. Going forward, it is unlikely that any government forgiveness schemes will deal with privately owned debt.

The repercussions of defaulting on private student loans are more severe

After 270 days of nonpayment, federal student loans are declared in default. There are still choices available to federal borrowers after that time. When a payment is missed on a private student loan, the loan goes into default 30 days later, and lenders can charge off the amount in as short as 120 days, leaving borrowers with few options to get out of default.

What are the cons of federal student loans?

There are a few drawbacks to federal student loans when compared to private student loans:

Loan origination costs apply to federal student loans

The origination charge for federal direct student loans is 1.057 percent, while the fee for PLUS loans is 4.228 percent. Fees for private student loans, on the other hand, are rare.

Borrowing limitations on federal student loans apply to undergraduates

Federal student loans for undergraduates have a maximum yearly borrowing limit of $12,500 and a maximum lifetime borrowing limit of $57,500. Graduate students can take out loans of up to $138,500 in total, or $20,500 per year. There are no aggregate restrictions on PLUS loans and many private loans, which are only limited by a school's tuition costs.

Federal student loans may not be the best deal for PLUS borrowers

PLUS loans for parents and graduate students have a stiff origination fee of 4.228% and interest rates of 7.54%. Borrowers with stable finances and a good credit history might find a better rate, with no fees, among private lenders.

Federal debt collectors have many more options

Private student lenders rely on the court system to sue and collect a judgment, and they are limited to your state's statute of limitations in their ability to do so. Federal debt collectors can bypass the courts to directly seize tax refunds or garnish wages — and can do so indefinitely.