Federal Loan Different From Private Loan

How is Federal Loan Different From Private Loan?

Several questions have gone over the need to understand how is federal loan different from private loan? Although both loans meet and solve almost the same need, yet there is a long list of differences which promote the fact that are never the same. A loan is the transfer of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money.

Whether you choose federal student loans or private student loans, you have to pay back the money you borrow, plus interest—whether you graduate or not. Student loans are legal agreements.


There are different types of loans. Some of these types of loans can be both secured and unsecured. A secured loan is a form of debt in which the borrower pledges some asset as collateral. A mortgage loan is a very common type of loan, used by many individuals to purchase residential or commercial property.

The lender of this type of loan which is usually a financial institution, is given security until the mortgage is paid off in full. In the case of home loans, if the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it.

A loan taken out to buy a car may be secured by the car. The duration of the loan is much shorter – often corresponding to the useful life of the car.

The unsecured loans are monetary loans that are not secured against the borrower’s assets. These may be available from financial institutions under many different guises or marketing packages: Credit cards, Personal loans, Bank overdrafts, Credit facilities or lines of credit, Corporate bonds (may be secured or unsecured), Peer-to-peer lending, etc.

  • Private Loan

Private college loans can come from many sources, including banks, credit unions, and other financial institutions. You can apply for a private loan anytime and use the money for whatever expenses you wish, including tuition, room and board, books, computers, transportation, and living expenses.

Unlike some federal loans, private loans are not based on a borrower’s financial needs. You may have to pass a credit check to prove your creditworthiness. If you have little or no credit history or a poor one, you might need a cosigner on the loan.

Private loans can come with higher borrowing limits than federal loans. The repayment period for student loans from private lenders may also be different. While some may allow you to defer payments until after you graduate, other lenders might require you to begin repaying your debt as you attend school.

  • Federal Loans

The U.S. Department of Education administers federal student loans. They tend to have lower interest rates and more flexible repayment plans than private loans. To qualify for a federal loan, you will need to complete and submit the government’s Free Application for Federal Student Aid (FAFSA).

The FAFSA asks questions about the student’s and parent’s income, investments, and other relevant matters, such as whether the family has other children in college. Using that information, the FAFSA determines your Expected Family Contribution (EFC). That figure is used to calculate how much assistance you’re eligible to receive.

The financial aid offices at colleges and universities decide how much aid to offer by subtracting your (SAI) EFC from your cost of attendance (COA). The cost of attendance includes tuition, required fees, room and board, textbooks, and other expenses.

To help make up the gap between what college costs and what the family can afford to pay, the financial aid office puts together an aid package. That package might include some combination of federal Pell Grants, federal loans, and paid work-study jobs.

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