Federal vs. Private Loans – There’s a Big Difference

When managing student loan debt, it is important to know what types of loans you have. Federal and private loans are very different.

How to Find Out What Type of Loan You Have

The first step is to log on to the National Loan Database System (NSLDS) to take an inventory of your federal loans.  If you do not have a PIN (it’s the same one you use for your FAFSA) you can get a new one at the Federal Student Aid website.

All federal student loans will be listed in the NSLDS, including Stafford loans (subsidized and unsubsidized), Perkins loans (which are issued by the school) and Parent PLUS loans.

Non-Federal Loans

If your loan does not appear in the NSLDS, it is a private loan.  The following loan types will NOT be listed in the database:

• Loans offered by state agencies.  For example, NJCLASS loans are written by the Higher Education Student Assistance Authority as an alternative to Parent PLUS loans.
• Private loans offered by banks, credit unions and student loan lenders such as Sallie Mae.

If you took out a federal loan before July 2010, it may have been part of the Federal Family Education Loan (FFEL) program.  Through this program, loans were made by private lenders and insured by the U.S. Department of Education. The program was cancelled on July 1, 2010 for new loans, but any loans in existence at that time remained in the program.

Private Student Loans

Federal student loans have standard interest rates and repayment options.  Private loans do not.  Federal loans generally have more favorable terms and flexibility.  Private student loans are best used as a last resort. We generally recommend exhausting all your federal student loan options first.

Most private loans have a variable interest rate.  The initial interest rate on many private loans can be quite attractive.  However, the longer you take to pay off the loan, the greater the risk that the interest rate will increase.  If the interest rate goes up, so does the required monthly payment.

The vast majority of private loans require a co-signer.  The co-signer is fully responsible for the loan. If the original borrower passes away,  the lender can pursue the co-signer (often a grieving parent) for the remaining debt.

Sometimes an obscure clause can have a big impact.  There was a case where a borrower had a private loan co-signed by his parent.  He was managing the payments well and had no financial difficulty.  The parent filed bankruptcy, and the borrower knew that he would still be responsible for the payments.  However, he was not aware that there was an acceleration clause in the loan agreement.  The clause stated that, if either the borrower or co-signer filed bankruptcy, the full loan balance was due immediately.

If you are considering taking out a private loan, it is vital to carry out due diligence before proceeding.  This is not to say that all private loans are bad, but knowing the long-term impact of your loan type can make all the difference.

Now that you have a better sense of what types of loans you have, you will be in a better position to develop a strategy to tackle your debt.