What is the Difference Between a Public and a Private Student Loan?

Student loans can mean the difference between fulfilling your educational aspirations, and giving up on your academic and professional dreams. There are both public and private student loan options to help you finance your education, and it is important to understand the difference between the two.

This article will guide you through the basics of student loans, how to understand both public and private options, and how to consider which type of financing is right for you.

What are Student Loans?

Student loans are similar to other types of loans: a bank, credit union, or other lending institution provides you funding upfront for a large expense (usually an asset such as a house or a car), which you gradually pay back over time through regular installments.

Student loans, however, are different from a mortgage or a car loan in one very fundamental sense: the underlying asset you are investing in is yourself. The monies you will receive are devoted to paying costs associated with studying, including tuition, lodging, and other expenses related to your schooling. This can even include childcare costs, if you have a dependent who requires looking after while you are studying.

Understanding Public Loans

The Federal government is far and away the largest provider of student loans, and they offer a number of different types of financing for students and their families.

There are three basic types of loans that the Federal government offers: Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct Plus Loans.

• Direct Subsidized Loans: Direct Subsidized Loans are based on financial need, with the amount you are eligible to borrow directly tied to schooling costs that are not covered by financial aid. The government will pay the interest on your loan if you are in school at least half-time. In addition, you can enjoy a grace period of 6-months after graduating (or leaving) school before you need to begin repaying your loan. You will not be responsible for interest payments during this grace period, or at any time when you elect to defer your payments.
• Direct Unsubsidized Loans: Direct Unsubsidized Loans are not based on financial need. Similar to the Direct Subsidized Loans, the amount you are eligible to borrow is determined by your school and is based on the outstanding costs of your education that are not covered by financial aid. Unlike Direct Subsidized Loans, your will be responsible for interest payments throughout the entire lifetime of your loan. There is a loan fee for both Direct Subsidized Loans and Direct Unsubsidized Loans. Since October 1, 2020, this fee has been 1.057% of the entire loan.
• Direct Plus Loans: These are available for both parents of dependent students, as well as for independent graduate students. (Students whose parents do not count them as dependents.) The amount you are eligible to borrow is based on the cost of education minus any other financial aid that student has received. You will need to demonstrate a strong credit history to be eligible for this loan opportunity. Alternatively, you can obtain a co-signer or demonstrate that there were extenuating circumstances that caused your credit score to drop. In addition to interest payments, borrowers must pay a fee of 4.228%.

These public loans have fixed interest rates, which are often lower than privately-offered loans.

To apply for these public loans, you need to fill out and submit the FAFSA, or the Free Application for Federal Student Aid. Beyond making you eligible to receive student aid, completing the FAFSA will allow you to receive work-study funds and loans. Importantly, the FAFSA must be filled out every year that you are seeking assistance. You can access the form online on the government’s Federal Student Aid website.

Understanding Private Loans

Private loans are another option for financing your education. While having some similarities with publicly-offered ones, there are some key differences that are important to understand.

Private loans are not based on financial need. Banks, credit unions, and other lending institutions will look at your credit history and decide whether you (or your co-signer) are dependable borrowers. Many lenders will communicate with your school to verify that you are indeed enrolled and to verify school-related costs such as tuition.

These private loans are very similar to loans on physical assets. The TipRanks’ student loan calculator can help you estimate your monthly payments, as well as the overall cost of your loan.

Public or Private: Which Option is Best For You?

Public loans tend to have better conditions than private loans, including lower interest rates, grace periods, and interest payment holidays. Another huge benefit is the potential for loan forgiveness, especially for those working in certain professions in the education and healthcare industries.

If given a choice, public loans tend to be the better option. Simply put, they will generally cost less money overall and have a number of additional benefits that private lenders cannot offer. However, not everyone will be eligible for public loans, in which case going to the private market can help you pay for the college education of your choosing.

Conclusion: Financing Your Education

Financing your education is no simple matter, and loans are one aspect of the equation to consider. Beyond your savings, financial aid, grants, and scholarships can also help you pay for school, and it is important to explore these options as well.

While sharing certain similarities, public and private loans have some key differences which are important to understand, and help explain why the public option is the preferred one. This includes lower overall costs and additional benefits which private lenders cannot offer. However, both avenues of financing can help you lead you to your ultimate objective, allowing you to follow your preferred course of study and arrive at the professional destination of your choosing.

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