Private Student Loans vs. Government Student Loans: What’s the Difference?

September 27, 2019

If you are looking forward to going to college and you know you need financial help, you may not give much thought to whether you should take out private student loans or federal student loans. Either way, you will end up with debt, right? The truth is, deciding between private and federal government student loans is not as simple as comparing apples to apples. Your financial future could be affected by your understanding of how these loans differ.

Government Student Loans

Federal loans for students are made by the Federal Government’s Department of Education. When you apply for this type of loan, you must submit a Free Application for Federal Student Aid (FAFSA) form. The information on this form will be used to determine i) how much federal student aid and what types of federal loans you qualify for and ii) your family’s contribution toward the cost of your education.

Private Student Loans

Any loans that are not issued by the federal government are defined as private student loans. Private loans are made by various types of lenders, including banks, credit unions, and lenders that specialize in loans to students. If you don’t meet the criteria set by the lender, you can still get a private loan, but you will need a co-signer who meets the lender’s requirements. In the event that you miss payments or default on the loan, your co-signer will be responsible for your debt.

The Difference in Interest Rates

Government Student Loans – Interest rates on federal loans do not depend on financial factors such as your or your co-signer’s credit rating and are therefore the same for each borrower. Also, the rate on newly originated Federal Direct Loans does not change throughout the repayment period. Currently, interest rates on federal student loans are based on the 10-year Treasury Note plus a fixed percentage increase depending on the loan type, with a cap set depending on the loan type. For example, direct undergraduate loans are based on the 10-year Treasury Note + 2.05% and are capped at 9.50%, according to the Congressional Budget Office. Student loan rates are set in the spring for each new school year, and they are effective from July 1 to June 30 of the following year.

Private Student Loans – Interest rates on these loans are set by the lenders and are based on various underwriting criteria including the credit history of you or your co-signer. This means that you may be able to qualify for private student loan interest rates that are lower than government loan interest rates. Additionally, you could be offered a private loan with a variable interest rate rather than a fixed interest rate. Although a variable rate means your rate may go up when you are repaying your loan, the rate could still beat what you would be paying if you had federal loans.

The Difference in Repayment Terms

Government Student Loans – The repayment terms for federal student loans depend on whether they are subsidized or unsubsidized. Subsidized loans are ideal because the federal government will cover the interest while you are finishing school or in deferment, whereas unsubsidized loans begin accruing interest as soon as they are taken out. Federal student loans also offer options of deferment and forbearance as well as income-driven repayment plans, making these types of loans slightly more accommodating if you may have trouble paying your student loans.

Private Student Loans – Private student loans come with different repayment plans depending on the lender. A private student loan from ELFI gives you a choice of several attractive repayment options including deferring repayment until six months after graduation. With terms ranging from 5-15 years, you can choose between having lower monthly payments or paying off your loans quicker.*

The Difference in How Much You Can Borrow

Government Student Loans – The government sets a cap on how much you are allowed to borrow both for each year of college and cumulatively.

Private Student Loans – At ELFI, we encourage all individuals to explore all scholarship and grant options available. We always advise potential students to go after the “free money” first, as there are thousands of scholarships and grants you can take advantage of each year.

After taking advantage of scholarships and grants, the full cost of your education may not be entirely covered. The next step is to look into Private Student Loan options to cover the remaining amount you need for your education expenses. If you have reached your limit with respect to federal loans, you can also make up the difference with private loans. Private student loans from ELFI can help to bridge the gap.*

Choosing Between Government Student Loans and Private Student Loans

It’s important that you consider all of the differences when deciding which types of loans are best for you. If you need assistance in working through your options, contact ELFI. We have years of experience devoted to helping students realize their college dreams, so don’t wait – give us a call today.*

*Subject to credit approval. Terms and conditions apply.

NOTICE: Third Party Web Sites

Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – The bank is not responsible for the content. Please contact us with any concerns or comments.

House Democrats Overturn DeVos on Student Loan Forgiveness

This Thursday, the Democrat-controlled House voted to overturn regulations introduced by Education Secretary Betsy Devos that eliminate the "borrower defense" rules introduced by the Obama administration. Critics have said the new regulations make it more difficult to get student loan forgiveness if a college suddenly closes. Sources say that the move to overturn Devos' new regulations won't pass the GOP-controlled Senate, however – and Trump is likely to veto the bill even if it does.

Source: USA Today

Could Elizabeth Warren Really Wipe Out $1 Trillion in Student Loans in a Single Stroke?

Democratic Presidential Candidate Elizabeth Warren recently vowed to eliminate hundreds of billions of dollars in student loans on her first day in office if elected president. Her plan was released just before Tuesday night's Democratic primary debate. While the ability to erase debt is typically a decision left to Congress, student loans may be a different story due to a loophole involving the "Higher Education Act" passed in 1965.

Source: CBS News

Study: Barely Anyone is Paying Off Their Student Loans

A recent study revealed that very few people are making progress on paying off their student loans, along with shifting factors in the nation's rising student loan debt. The study found that 51 percent of students who took out loans from 2010-12 haven’t made any progress in paying them off. Additionally, it showed that while in the past higher enrollment and rising tuition costs were the main drivers in the rising debt, slow repayments and amassing interest have now become the primary drivers.

Source: NY Daily News

IRS Issues Tax Guidance On Discharged Student Loans

The Internal Revenue Service recently issued guidance for some taxpayers who took out federal or private student loans and qualified to have their loans discharged. Typically, having loans discharged is treated as a taxable event, in which the forgiven amount is treated as income – but the tax break from the IRS allows the discharged amount to not be recognized as taxable income.

Source: Forbes

That wraps things up for this week! Follow us on Facebook, Instagram, Twitter, or LinkedIn for more news about student loans, refinancing, and achieving financial freedom.

Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.

2020-01-10

This Week in Student Loans: January 10

This week in student loans:

Half of Income-Driven Repayment Borrowers Miss Recertification Deadlines
Colorado Weighs "Get On Your Feet" Bill to Assist College Graduates in State
Filling Out FAFSA Won't Get You Drafted, Experts Say
The Student Loan Forgiveness Tax Bomb
ELFI Surpasses $1 Billion in Student Loan Refinancing

Income-Driven Repayment Borrowers After Missed Deadlines to Recertify

Half of Income-Driven Repayment Borrowers Miss Recertification Deadlines

Over 8 million student loan borrowers use the Federal Income-Driven Repayment plan to help afford monthly payments. The plan can drop payments as low as $0 per month, depending on the borrower's income and family size. However, in order to stay in these plans, borrowers must recertify annually to avoid consequences such as increased payments, a larger loan balance, and potentially defaulting on the loans. ABC News reported that according to Department of Education data, more than half of borrowers miss the deadline to recertify. While they will likely have to recertify annually, a new law is being put in place to allow borrowers to opt into automatic recertification. The article encourages borrowers with income-driven repayment plans to watch for the option to become available.

Source: ABC News

Colorado weighs "get on your feet" bill to help in-state graduated with student loans

Colorado Weighs "Get On Your Feet" Bill to Assist College Graduates in State

New graduates of public colleges in Colorado may have more incentive to stay in-state following graduation due to a new bill in the works that could mandate the state to pay their student loan payments for two years. If passed, the "Get On Your Feet" bill will take effect for public college graduates who commit to staying in Colorado and enroll in an income-based repayment program.

Source: Denver Post

college student panicking because of FAFSA rumors

Filling Out FAFSA Won't Get You Drafted, Experts Say

With tensions rising between the U.S. and Iran this week, a misinterpretation of the fine print within the FAFSA application led some college students to panic over the potential of being drafted. Despite the widespread social media panic, experts say that the federal form won't actually increase your chances of being drafted.

Source: USA Today

student loan forgiveness tax implications

The Student Loan Forgiveness Tax Bomb

Forbes writer Robert Farrington published an article on January 6 highlighting the tax liabilities that borrowers who receive loan forgiveness through income-driven repayment plans will face. While it's not widely known, forgiven debt is treated as taxable income during the year that debt is forgiven through an income-based repayment plan. The article outlines the surprising amount that borrowers might pay in taxes when having their loans forgiven.

Source: Forbes

ELFI team celebrates $1 billion in refinanced student loans

ELFI Surpasses $1 Billion in Student Loan Refinancing

Education Loan Finance (ELFI), a division of SouthEast Bank, announced the successful funding of over $1 billion in student loan refinancing and consolidation loans. This funding has positively impacted over 14,500 graduates, parents, and cosigners since they began offering student loan refinance products in December of 2015. ELFI maintains an industry-leading “Excellent” 4.8/5 rating on Trustpilot.com and has been named one of NerdWallet's Best Student Loan Refi Companies for Customer Service for 2019.

Source: Education Loan Finance

That wraps things up for this week! Follow us on Facebook, Instagram, Twitter, or LinkedIn for more news about student loans, refinancing, and achieving financial freedom.

2020-01-09

Resolutions: How to Erase Your Student Loan Debt by 2025

By Kat Tretina

Kat Tretina is a freelance writer based in Orlando, Florida. Her work has been featured in publications like The Huffington Post, Entrepreneur, and more. She is focused on helping people pay down their debt and boost their income.

If you’re like most college graduates, you left school with student loan debt. According to The Institute for College Access & Success, graduates have $29,200 in student loans, on average. Depending on your repayment term, you could be in debt for a long time. In fact, you could make payments for anywhere from 10 to 30 years. Having such a large burden on your shoulders can cause you to put off other goals, like starting a business or buying a home. To free yourself from your student loan debt, think of repayment strategies to pay off your student loans as soon as possible. If you’re determined to become debt-free, here’s how to pay off your student loans by 2025.

1. Create a budget

To pay off your student loans early, you need to have a complete picture of your finances, so you know exactly how much money you have to work with. Creating a monthly budget is an essential first step. You can use programs like Mint or You Need a Budget (YNAB) to craft a budget and track your spending. Hopefully, you make more money than you spend each month. If that’s not the case — or if money is tight— you’ll have to make some changes to your lifestyle.

2. Cut Corners

To free up more money for debt repayment, you’ll have to take a hard look at your expenses and make some significant cuts. These life changes are not just for recent college students or those just starting out in their careers. If you’re committed to changing your financial situation in a short amount of time, some drastic life changes may be called for. Some things to consider include:

Getting a roommate: While having a roommate may not be ideal, it can be a worthwhile decision. Considering that the average one-bedroom apartment costs $1,025, getting a roommate can help you save over $500 per month. That savings could make a big dent in your student loan balance.
Taking public transportation: If possible, skip buying a car and rely on buses and trains, instead. You’ll be able to save money on a car payment, insurance, and repairs for a vehicle.
Moving to a cheaper area: While moving to a more affordable area isn’t feasible for everyone, it can be a great way to save money. Moving to a less trendy area or even to another state can help you drastically reduce your living expenses.

>> Related: U.S. Cities With the Most Student Loan Debt

Cooking at home: According to the Bureau of Labor Statistics, the average American spends $3,469 per year on food consumed away from home, such as restaurants or fast food locations. If you skip eating out and brown-bag your meals, you could save thousands.
Negotiating bills: You’re probably paying more than you need to for your cell phone, cable, and internet. You can use a service like Trim to negotiate your utility bills for you, reducing your monthly expenses.

3. Increase Your Income

Exploring ways of increasing your income isn’t just for new college graduates. Even if you’re gaining a firm foundation in your career and just want to attack your student loan debt with voracity, putting in extra work hours could accelerate your financial goals. With a side gig, you can earn a significant amount of money. According to a BankRate survey, the average side job earns an individual $1,122 per month — which can make a big difference in knocking down your student loan debt. Here are some ideas to help you get started:

Deliver groceries: If you have a car and a smartphone, you can make money delivering groceries for services like Shipt or Instacart. Depending on your location and speed, you could make up to $22 per hour.
Rent out extra space: If you have a spare bedroom, closet, or empty garage, you can earn cash by renting out your extra space to locals who need to store items with Neighbor.
Tutor online: If you have a computer and reliable internet, you can earn money by tutoring online. With services like Tutor.com and Chegg, you can make up to $20 per hour.
Assemble furniture: If you have a knack for assembling Ikea furniture or toys, you have a lucrative side hustle. You can find clients with TaskRabbit or Takl.
Walk dogs: If you love dogs, you can earn an hourly fee for walking them while their owners are at work. Create an account on Rover or DogVacay to get started.
Work overtime: Public service officials, medical professionals, and educators can make a substantial amount of money on the side by working overtime.
Offer consultation services: If you’re a savvy marketer or have a knack for e-commerce, create a side business of setting up social media accounts for local businesses.

4. Research Student Loan Repayment Assistance Programs

Depending on your major and location, you may qualify for student loan repayment assistance. For example, highly qualified teachers who teach for at least five years at an eligible school can receive up to $17,500 in loan help through Teacher Loan Forgiveness, a federal program. Healthcare providers in Pennsylvania can receive up to $100,000 in student loan aid through the state’s Primary Care Loan Repayment Program. In exchange, participants must agree to a service term in a high-need area. In Florida, lawyers who work for a legal aid organization can receive up to $5,000 per year through the Loan Repayment Assistance Program. To find programs you may qualify for, check out the federal government’s list of forgiveness programs, and visit your state’s Department of Education website.

5. Use Windfalls Strategically

Using windfalls — unexpected influxes of cash — strategically can cut off years from your loan term. For example, the IRS reported that the average tax refund in 2019 was $2,860. To put that number in perspective, let’s say you had $30,000 in student loans with an interest rate of 5% and ten years left in your repayment term. If you made a lump sum payment of $2,860, you’d pay off your student loans 14 months early. And, you’d save $1,722 over the length of your loan.

6. Consider Student Loan Refinancing

If you’re determined to pay off your debt as quickly as possible, student loan refinancing can be a smart strategy. To refinance student loans, you work with a private lender like ELFI* to take out a new loan for the amount of your existing debt. The new loan has different repayment terms than the old ones. You’ll have a new interest rate, loan term, and minimum monthly payment. If you have good credit and steady income, you could qualify for a lower interest rate and save money. Let’s say you had $35,000 in student loan debt at 7% interest with a 10-year repayment term. By the end of your repayment term, you’d pay a total of $48,766. Interest charges would cause you to pay back $13,766 more than you originally borrowed. If you refinanced your student loans and qualified for a 10-year loan at just 5% interest, you’d repay $44,548. Refinancing your debt would help you save $4,218. ELFI’s Student Loan Refinance Calculator can help you determine how much you could save by refinancing.

7. Avoid Lifestyle Inflation

As your career advances and you start to pay off some of your loan debt, you might be tempted to splurge on a new car, bigger apartment, or fancier electronics to reward yourself. However, try to avoid the urge. Instead, allocate any extra money you have toward your loan payments. You’ll pay off your student loans faster, so you can become debt-free and enjoy more freedom.

The Bottom Line

While your debt may be stressful, you can conquer it by coming up with detailed student loan repayment strategies. With some sacrifice and hard work now, you can eliminate your debt years ahead of schedule. If you decide to refinance your student loans, use ELFI’s “Find My Rate” tool to get a rate quote, without impacting your credit score.