1.How do private student loans and federal student loans differ?
You apply for a federal student loan by submitting a FAFSA. Taking on a federal loan means you’re borrowing a loan funded by the government. You apply for a private student loan through a bank, credit union or online lender.
Federal student loans offer borrowers protections and alternative repayment options that private loans may not, such as income-based repayment and forgiveness programs. Federal student loans also have flat interest rates set by Congress, while the interest rate on a private student loan depends on your or your co-signer’s credit. Without a credit score of at least 690, you’ll likely pay a higher interest rate for a private loan than you would for a federal loan.
FEDERAL STUDENT LOANS
|PRIVATE STUDENT LOANS|
|Lender||Federal government||Private banks, credit unions, and other lenders|
|Interest Rate Type||Fixed||Fixed or variable|
|Repayment Options||Not required until after graduation||May be required while in school or not until after graduation|
|Approval Based on||The FAFSA and expected family contribution||Creditworthiness, income, debt, school, sometimes field of study, and other factors|
|Cosigner Requirements||Do not need a cosigner||Most private lenders require a cosigner|
2.How do I qualify for a private student loan?
Each lender will have its own requirements for taking out a loan. With most loans, credit score and income are taken into account. Higher scores and incomes tend to get the best rates or higher borrowing amounts. However, since undergraduate borrowers are less likely to have established credit or an income, lenders will usually require students to apply with a co-signer. Some lenders who have loans for borrowers without a co-signer will consider career and income potential.
Lenders will often require you to attend a Title IV school, which means your school processes federal student aid. Some lenders don’t offer loans in certain states.
3.Student Loan Consolidation vs. Student Loan Refinancing
In short, the term “consolidation” is used to describe the process of combining multiple loans into a single loan, while the term “refinancing” is used to describe the process of using a more advantageous loan to repay an older loan. While refinancing is often used in other realms of finance (like mortgages) to describe replacing a single older loan with a new one, consolidating with a private loan technically includes refinancing as well, since the term and interest rate of the new loan are different from the old loans. Getting a federal consolidation loan isn’t usually considered “refinancing,” since the interest rate of the new loan is equal to the weighted average of the loans being consolidated.
|Student Loan Consolidation||Refinancing|
|You’ll combine multiple student loans to turn it into one payment.||You’ll get a new loan that replaces the old one.|
|Generally, you consolidate loans to simplify the process of paying them.||Generally, you refinance to get a lower interest rate or monthly payment and to save money.|
|Usually, after consolidation, the schedule will have your debts paid off in 10 years.||When refinancing, you can sometimes structure it so that you have up to 20 years to pay off the debt.|