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Repaying Private Versus Federal Student Loans

Louis DeNicola

October 17, 2019

Whether you took out federal or private student loans to pay for school could make a difference once you start repaying the loans. Not only will you send your payments to different servicers, but your repayment options can greatly depend on the type of loan.

A quick overview – federal vs. private student loans

Here’s a side-by-side comparison of how federal and private student loans compare in terms of repaying the loans, and your options if you have trouble making payments.

 

Repayment plans

Federal student loans: Eligible for up to eight repayment plans, including options that base your payment amount on your income.

Private student loans: Some private lenders may offer different repayment plans, but most don’t include an income-driven plan.

Interest rates

Federal student loans: May have a variable or fixed interest rate. However, all federal student loans issued since July 2006 have a fixed interest rate.

Private student loans: May have a variable or fixed interest rate regardless of when the loan was issued. 

Deferment and forbearance

Federal student loans: Federal student loans are eligible for federal deferment and forbearance programs.

Private student loans: Deferment and forbearance options can depend on the lender and may be offered on a case-by-case basis.

Subsidized interest

Federal student loans: The federal government pays interest on subsidized federal loans while they’re in deferment.

Private student loans: Private student loans aren’t subsidized, although some lenders may temporarily lower your interest rate during a hardship. 

Discharge and cancellation

Federal student loans: Federal student loans are eligible for federal cancellation and discharge programs. 

Private student loans: Options may vary by lender and your loan. 

Forgiveness and repayment assistance

Federal student loans: Most forgiveness and repayment assistance programs only apply to certain types of federal student loans.

Private student loans: Some employer- and state-based programs cover private student loans.

Defaulting

Federal student loans: Federal student loans go into default after 270 days of nonpayment.

Private student loans: The timeline depends on your contract. Private student loans generally default after 90 to 180 days of nonpayment. 

Prepayment penalty

Federal student loans: No

Private student loans: No

Are federal or private student loans easier to repay?

If you can afford your monthly student loan payments, it generally won’t make a big difference if you’re repaying federal or private student loans. Keep sending off the payment each month, and eventually, you’ll repay your student loan and get to forget about it altogether.

However, the differences could be important in several scenarios. (Hint — federal student loans are generally easier to manage and offer more benefits to borrowers).


Federal student loans may be easier to manage when you’re having financial trouble

Whether you lost your job, are dealing with a medical emergency, decide to go back to school, or simply can’t earn enough to cover all your bills, you may have trouble affording your monthly payments. 

With federal student loans, you might be able to switch to an income-driven repayment plan which could lower your monthly payment — in some cases all the way down to $0. Changing repayment plans is free, can be done multiple times, and can make it easier to manage your student loans without having to miss a payment and hurt your credit history or pay a late payment fee.

Private student loans aren’t eligible for federal income-driven plans. 

You also may be able to temporarily stop making payments by putting your loan into either deferment or forbearance. The result is basically the same – you can skip a predetermined number of payments without the loan servicer considering you late.  

However, with deferment, you won’t have to pay interest on your subsidized federal student loans. Other types of loans in deferment and all loans in forbearance will accrue interest that will be added to your loan’s principal balance once you restart your payments. 

Private student lenders may also offer deferment or forbearance. However, approval isn’t guaranteed, like it sometimes is with federal student loans, and interest will always continue to accrue. 


Federal student loans may be eligible for forgiveness, cancellation or discharge

If you’ve already switched to a federal income-driven plan and realize that you’re monthly payments aren’t making a significant impact on your student loan, you may be feeling stuck. Fortunately, your loan’s remaining balance will be forgiven after 20 to 25 years of repayment on an income-driven plan. It’s a long time, but you won’t be stuck repaying your loans forever. 

Federal student loans may also be eligible for other forgiveness, cancellation, or discharge programs that could clear away your student loans. 

Private student loans generally don’t qualify for these programs. Some companies and state organizations have programs that apply to federal and private student loans, but they’re often targeted at employees in high-need fields, such as healthcare and law. 


Did you default on a loan? Look into rehabilitation programs

If you fall far enough behind on your payments, your loan servicer may put your loan into default. When this happens, you’ll immediately owe the remainder of your loan amount plus any fees – no more payment plans.

There are several ways to get a federal student loan out of default and back on a payment plan. If you go through a loan rehabilitation program, you may even be able to get the default off your credit reports, which could help your credit scores.

Private student loans can go into default more quickly. Also, although private lenders can offer rehabilitation programs and request the removal of a default from your credit reports, there isn’t a straightforward policy for everyone. Your options can vary based on the lender and what it wants to offer you. 


Stuck with a variable rate? Consider consolidation or refinancing 

If your student loan has a variable interest rate that keeps increasing, you may want to replace the loan with a fixed-rate student loan. 

You may be able to consolidate federal loans, combining multiple loans into one and locking in a fixed rate while maintaining your access to federal benefits and programs. 

Depending on your creditworthiness, you may also be eligible for student loan refinancing, which allows you to take out a new private student loan and use the money to pay off your current loans. Essentially, by refinancing your turn the federal and private student loans you refinance into a new private loan. 

Managing your loans with these differences in mind

Knowing the difference between federal and private student loans can help you make an educated decision when you’re trying to manage student loans. 

If you can afford to make extra payments, you may want to pay down the private student loans first as they generally offer fewer benefits to borrowers. Or, if you feel confident that you won’t have trouble affording payments later, you could start with whichever loan has the highest interest rate to help save you as much money as possible.

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