Student loans are a big topic for many people. In the U.S., about 35% of adults ages 19 to 28 report student loan debt [1]. They do come in different forms: federal and private. Federal loans are offered with fixed rates and the possibility of debt forgiveness, while private loans are more restrictive and dependent on credit scores. Knowing the difference between the two can help students and their families make better financial plans.
What Are Student Loans?
Student loans are the money lent to students and their families for college or university. Unlike scholarships and grants, which are gifted money and do not have to be repaid, loans must be paid back with interest. Interest is the cost of using the money.
There are two main kinds of loans for students:
- Federal student loans: These loans are issued by the government and offer fixed interest rates and flexible repayment terms. Certain federal loans could be forgiven if a student works in government service or as a teacher in an eligible area.
- Private student loans: These are those acquired from banks and other private institutions. These loans vary widely in interest rates and repayment terms, depending in part on your credit history. Personal loans are generally stricter; they are generally not forgivable.
Federal Student Loans
The U.S. government provides federal loans for college. Here is what you need to know:
- Types of loans: There are subsidized and unsubsidized loans. With subsidized loans, the government pays the interest while you’re in school. Unsubsidized loans are available to everyone, but you have to pay the interest upfront.
- Interest rates: Federal loans have fixed rates that never change, so it’s easy to set a payment plan.
- Repayment plans: You can choose from standard, graduated, or income-based plans, which help you tailor your payments to your income.
- Loan forgiveness: Depending on your job, like with the government, your debt may be forgiven after serving a certain number of years.
- Deferment: You can temporarily stop or reduce your payments if you have a financial problem.
Can You Cancel Federal Student Loans?
Yes, federal loans are cancellable in certain circumstances, helping to lighten the financial burden substantially for those who qualify. Here is a simple breakdown of how this can be done:
- Forgiveness programs: The Public Service Loan Forgiveness program will forgive the remaining debt after 10 years of qualifying payments for people working full-time in government, non-profit, or public service jobs.
- IDR plans: If you enroll in any federal government IDR plans, you will be eligible for loan forgiveness after a year 20 or 25, depending upon the chosen plan. This plan will be highly beneficial for those with lower incomes compared to the amount of their debt.
- Teacher Loan Forgiveness: Full-time teachers who have worked for five consecutive years in a school serving students from low-income families could be eligible for up to $17,500 in federal student loan forgiveness.
- Disability Discharge: You may also be eligible to have your federal student loan discharged if you become totally and permanently disabled. This involves proving that you have a disability; afterward, a monitoring period would ensure it is permanent.
- School Closure: If your school closes while you’re enrolled or shortly after you withdraw, you may be eligible for the discharge of your federal student loans.
Other less frequent occurrences include the borrower’s death, false eligibility certification, the school’s failure to pay refunds, and bankruptcy cases. However, the latter is quite rare and involves an extremely complicated legal process.
Private Student Loans
Private student loans are a way to fund your education, and banks and other financial institutions provide them. Highlights of the main points follow.
- Credit Score: Private loans are based on creditworthiness. The better your credit score, the lower the interest rate. Students with no credit history may need a co-signer.
- Interest rates: These are either fixed, meaning they do not change, or variable, meaning they could go up or decrease over time.
- Co-signer: Many students have a co-signer, generally a relative.
- Repayment: Private loans are not as flexible. There are few options for deferment or forbearance.
- No loan forgiveness: Private loans are not eligible for forgiveness programs and remain in effect even in bankruptcy.
- Application: This involves approaching several lenders for the best terms.
Cancellation Options for Private Student Loans
Cancellation of private student loans is a good deal more complicated than with federal loans. Here’s what you need to know about how you might be able to cancel or discharge private student loans:
- Death or Disability: Most private lenders will discharge a student loan upon the borrower’s death or when the borrower becomes permanently disabled. However, this can vary depending on the lender, so reviewing your loan agreement for specific terms is important.
- Bankruptcy: This is when the bankruptcy court discharges a private student loan. The process is rarely used, and it is hard to prove an undue hardship in repaying the loan.
- School Closure or Fraud: If your school closed while you were attending, or within a certain timeframe after withdrawal, or your school was found guilty of certain fraudulent activities, you might be eligible for discharge. However, this is generally more limited than compared to federal loans.
- No Forgiveness Programs: Unlike federal loans, private student loans do not offer forgiveness programs such as Public Service Loan Forgiveness or Teacher Loan Forgiveness.
Another option is refinancing. Since cancellation options are limited, some borrowers refinance private student loans. Refinancing with another lender may offer different terms, such as a lower interest rate, which could help alleviate the burden of the initial loans.
Side-by-Side Comparison: Cancellation Policies
Below is a table that shows the main differences in the rules for forgiveness of federal and private student loans:
| Feature | Federal Student Loans | Private Student Loans |
| Forgiveness Programs | Offers some of them, such as Public Service Loan Forgiveness and Teacher Loan Forgiveness. | Rarely offered. |
| Income-Driven Repayment Forgiveness | Available after 20-25 years in the qualified plans. | Not available. |
| Disability and Death Discharge | If the borrower becomes permanently disabled or passes away, then the loan is discharged. | Similar options exist, but terms do differ from lender to lender. |
| Bankruptcy Discharge | Very rarely discharged; need to be proven based on proof of “undue hardship.” | Infrequent: Most require proving “undue hardship,” which is often hard to come by. |
| Other Discharges | Available in school closures, false certification, or identity theft. | Very rare; usually, only for the closure of schools or fraud. |
| Standardization | Cancellation terms are standardized across all federal loans. | Sometimes, the terms differ between various lenders and even between different loan agreements. |
Conclusion
The question of federal versus private student loans is important because it will significantly affect your financial future. Federal loans are a ‘safe’ option for most people, offering options for flexible repayment and forgiveness. Private loans become a good option when federal funds are inadequate; however, the terms should be duly understood, and a confidence level must prevail in the ability to repay.
Before accepting, consider your potential career, earnings, and need for repayment terms. Loans allow you to attain an education but often remain a debt load for many years. Read over all the conditions, discuss them with your loved ones, and make the right decision for yourself.