Student Loans

Federal Loans, Private Loans, and How to Tell the Difference

With the high cost of attending college, many students and their families have had to take out one or more student loans. When students graduate, decent-paying jobs are not always available. As a result, many borrowers report difficulty repaying their student loans, and loan servicers and debt collectors are not always easy to work with. The following information is for anyone seeking to repay student loans.

Know Your Loans 

The first thing you should do if you have difficulty repaying a student loan is to determine what kind of loan you have. This will affect your rights. There are two main types of student loans: (1) federal student loans—which are guaranteed or issued by the federal government, and (2) private or non-federal student loans—which are issued by private lenders, a state agency, or by the schools themselves.

Federal Student Loans

The largest provider of student loans is the U.S. Government. Before 2010, most “federal” loans were made by private financial institutions but guaranteed by the federal government. Today, however, federal student loans are issued directly from the U.S. Department of Education. For these “federal direct” loans, the federal government is your lender. The Department of Education currently offers three primary types of federal student loan programs: Direct Loans, Direct PLUS Loans, and Direct Consolidation Loans. These loan programs are outlined below. If you want more information, you should consult the Department of Education’s website at: www.studentaid.gov/understand-aid/types/loans.

Federal Direct Subsidized and Direct Unsubsidized Loans

Federal Direct Subsidized and Direct Unsubsidized Loans are the largest federal student loan program, often referred to as Stafford Loans or Direct Stafford Loans:

• Direct Subsidized Loans are available to undergraduate students who demonstrate financial need. The school determines the amount that the student can borrow. The government pays interest during your time in school, grace periods, and periods of deferment for this low interest loan.
• Direct Unsubsidized Loans are available to undergraduate and graduate students. A student does not need to demonstrate financial need to qualify. The school determines the amount a student can borrow. The student is responsible to pay the interest during all periods.

Direct PLUS Loans

Direct PLUS Loans, commonly referred to as parent PLUS loans, are available to parents of undergraduate dependent students, and to graduate or professional degree students. PLUS loans assess a loan fee that is proportionately deducted from each loan disbursement. Interest is charged during all periods and PLUS loans require a credit check.

Direct Consolidation Loans

Direct Consolidation Loans allow consolidation of eligible federal loans into one loan with a single loan servicer after the borrower leaves school. Direct PLUS Loans can generally be consolidated, however, Direct PLUS Loans received by parents to help pay for a dependent student’s education cannot be consolidated together with federal student loans that the student received.

Private Student Loans

Private student loans are made by private financial institutions and lenders, such as banks and credit unions. These private loans are generally more expensive than federal student loans and differ from federal loans in many ways. For example, private loans will, generally:

• Require applicants to qualify based on credit scores or will require a “co-signer” to be subject to repayment
• Require repayments while borrowers are still in school
• Charge variable interest rates, which can go up as the marketplace changes
• Charge higher interest rates than federal student loans
• Offer few repayment options or protections for borrowers who struggle to repay the debt

Colleges and universities may also offer “institutional” loans to finance a student’s education when they cannot obtain financing from federal loans or other private student lenders. Students should be careful to sign up for these loan products. Some schools have in the past charged extremely high interest rates on those loans. Schools also frequently will prevent students from attending class, taking exams, obtaining transcripts, or getting a diploma if institutional loan balances are unpaid.

Schools may also offer or have relationships with lenders to offer “income share agreements” or ISAs. These are student loans that involve the borrower receiving credit or money to fund their education or training, but instead of a standard monthly repayment, the borrower promises to pay a fixed percentage of their income after leaving school. Students should be careful when entering an ISA because they may end up charging far more than a traditional student loan would and do not fully disclose the terms and implications of the ISA. Many private student loans also require repayment while the borrower is still in school.

Private Loans

Private Loans may be offered by private financial lenders, such as a bank or credit union or offered directly by a school. In general, private loans are more expensive than federal student loans, and eligibility often depends on your credit history. Many private student loans require a cosigner and require payments while you are still in school. The interest on private loans may be variable. A variable interest rate means the rate can go up as interest rates in the marketplace rise. A higher interest rate means higher monthly payments and bigger loan balances. There may be fewer protections and fewer repayment options for private student loans as compared to federal student loans.

SELF Loans

The Minnesota Student Educational Loan Fund (SELF) Program is a long-term, low-interest educational loan from the Minnesota Office of Higher Education, a state agency. The loan program is only for Minnesota residents, and a cosigner is required. Before you apply for the SELF Loan, be sure to look into any federal education loans for which you may be eligible. In general, SELF loans do not have as many benefits or repayment options as federal student loans. For information on the Minnesota SELF Loans, contact the Office of Higher Education as follows:

Minnesota Office of Higher Education
1450 Energy Park Drive, Suite 350
St. Paul, MN 55108-5227
(651) 642-0567
selfloan.ohe@state.mn.us
www.selfloan.state.mn.us/index.cfm

How to Determine Your Loan Type

You may have more than one student loan, or may have both private and federal student loans. The following may assist you in compiling and tracking your loan information and planning for repayment of your loans:

Keep Track of Your Loans

Keep paper or electronic copies of your student loan papers. It is important to keep track of the lender, loan servicer, balance, and repayment status for each of your student loans. These details help determine your loan repayment and other program options.

Federal loans

To identify any federal student loans you may have, visit the U.S. Department of Education website https://studentaid.gov/fsa-id/sign-in/landing.

Non-federal loans

If you cannot locate your loan through the the U.S. Department of Education website, you probably have a private or state SELF loan. To locate more information about private student loans, you should contact the loan servicer that may send you communications and monthly statements. You can also try viewing a free copy of your credit report, get in touch with your school’s financial aid office, or contact the Minnesota Office of Higher Education to see if they can help you to identify your student loans.