Federal vs. Private

In order to fully understand the difference between a federal loan and a private loan, it’s important to first understand what makes a student loan unique. Unlike credit card debt, mortgages, and even some court judgments against you; filing for bankruptcy almost never discharges your student loan debt. It follows you and there is no easy way to make it disappear. As a result, it is very important to have loans with the most flexible and forgiving terms. If you fall on hard times, dealing with a difficult student debt situation can make a hard situation even worse.

The sad reality of today’s economy is that many college graduates find themselves with a fancy new degree and no income. Then the student loan bills start arriving in the mail, emails fill their inbox, and lenders call daily. If the recent grad cannot make payments it’s only a matter of time before this information shows up on a credit report. Looking at the situation of a recent graduate with little to no income is perhaps the best way to fully understand the differences between federal and private loans.

Federal Student Loans:

– The borrow has 3 years worth of economic hardship deferments
Repayment plans that factor in the borrower’s income are available
Consolidation of the debt is available
– The debt may even be forgiven if the borrower pays what they can

Private Student Loans:

– Failure to pay shows up much earlier on the borrower’s credit report
– Repayment plans are at the discretion of the lender
– Interest rates are normally higher
– Loan forgiveness is not an option

-> Sherpa Tip: A private loan is almost never a better alternative to a federal loan. If you are thinking about going this route, be sure to look at all of your options, and carefully consider your decision.

Further Reading: