Comparison between federal and private student finances
As the name suggests, Federal finances are granted by the government while private lenders provide private funds. If we compare their benefits, then former financing arrangement is more beneficial as compared to latter. Following are the summarized differences between two categories of finances that will help you in judging the best financing arrangement:
- The first difference is regarding repayment terms as the repayment process under federal finance starts after the completion of education. It is not the case with private finance where repayment begins even if a student is pursuing his or her studies.
- The interest rates charged under federal finance is low and is fixed while in private finances it is variable. It depends on the creditworthiness of the borrower or the cosigner. However if interest rate is variable, the amount to be repaid will go high
- Most of the federal finances can be available without checking credit history. In the case of a private funding, lender demands strong credibility of either borrower or cosigner. The strong credit history will decide the terms & conditions of loans such as interest cost & repayment terms. '
- The interest paid on federal loans can be claimed as the deduction under income tax while interest cost of private finance cannot be claimed.
- No cosigner is required in case of government finances available for students. A cosigner is required for private student finance. It is the reason private student funding is not readily available. Its approval is easily available if the cosigner has the good credit record.
- The borrower can consolidate federal finances. Such option is not available to private finances. This consolidation process is adopted by borrowers as it makes the repayment easy.
- The borrower can request the finance provider under federal loans for deferring the repayment temporarily in case of any special circumstances. The lender will grant forbearance easily if the reason is genuine. It depends on lender's choice to allow the suspension of repayment under private finance. As we studied that terms of loan vary from lender to lender, so if loan provider feels comfortable he can grant suspension. But there is not the surety.
- Federal loans grant forgiveness in special cases such as if the borrower is in public service department then he may get exemption of repayment on some portion of the loan amount. In the case of private finance, forgiveness is granted only in the event of permanent disability or death.
- Prepayment penalty fee is not charged from a borrower in case of federal finance. In the case of another category of finance, it will depend upon lender & borrower is required to check this before borrowing the loan amount.
Higher Loan Amount
The student can also avail higher loan amount at reduced interest cost & fees. Both the lenders and borrowers interest shall be protected as in the case of default; the cosigner will be contacted who will be responsible for removing the default & reducing the risk of both lenders as well as the borrower.