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Federal vs. Private Loans

Private Student Loans

Private student loans are those which are secured through a private lending institution based on the applicant’s credit. It is no different than a mortgage, car loan, or credit card. The only difference involves bankruptcy. As of October 2005, most private education loans cannot be discharged through bankruptcy. However, this may change in the near future.

Federal Student Loans

There are were* two sources of federal loans:

  1. Direct Loans: originated directly through the Department of Education (ED) via the William D. Ford Direct Loan Program. When repayment starts, payments are made directly to ED (or a servicer for ED).
  2. Federal Family Education Loan Program (FFEL): offered through various private institutions and private guarantors, but the money is guaranteed by the ED. When repayment starts, payments are made to the private institution that originated the loan, or its servicers. What is meant by ED will guarantee the money? It means if a borrower fails to repay a loan to a private institution, that private institution will file a claim and transfer the loan to the guarantee agency. The agency has the same powers as ED to enforce the loan. If the loan stays in default for too long, the agency can file a claim and transfer the loan to ED. At that point, ED will attempt to collect the loan.
    *New legislation passed in early 2010 has put an end to FFEL loans.

There are many types of federal loans, however, the three most popular are Stafford, PLUS, and Perkins.

Stafford loans can be subsidized (the government pays the interest during deferment but not forbearance), and unsubsidized (interest accrues during deferment periods).

PLUS loans are for parents while their child is an undergraduate OR for graduate students for graduate studies. PLUS loan eligibility is based on creditworthiness – the only federal loan that requires credit.

Perkins loans are funded through schools directly and upon repayment, paid back to schools directly. The school may hire a debt collector to attempt to collect a past due Perkins loan. The school also has the option to transfer a default Perkins loan to ED, at which point ED will attempt to collect the loan. 

Read more: Default and Repayment