Private Student Loans vs. Federal Grants

By Nancy Ziering, Special to

Private Student Loans vs. Federal GrantsThere are some big differences between federal grants and private loans that students and their parents should be aware of. Both are good ways to finance a higher education, but one does have advantages over the other.

Federal grants are money that students get from the government to pay for their education expenses, provided they meet the required criteria. Federal grants are almost always based on need, where private loans may not be.  The big advantage to grants is that they don’t have to be paid back. They are essentially “free money”.

While most people are aware of the Pell grant since it is the most popular, there are several others available, include some for single mothers and those looking to pursue certain majors like teaching, science, technology and foreign languages useful to homeland security.  To obtain a federal grant, you will need to fill out the Free Application for Federal Student Aid (FAFSA) and have it processed at the financial aid office at your school. This single application will allow you to apply for all the federal financial aid available to you.

Private loans are exactly what they sound like. They are loans from private institutions or organizations that will need to be paid back with interest. The interest rates on these loans can vary quite widely and they usually don’t depend much on your financial need as they do on your credit score, or that of your parents. It’s important to keep in mind that loans should only be used as a last resort. First of all, anything you need to pay back with interest is going to cost you more in the long run and it’s very easy to get into trouble financially and default on the payments. Private loans may be harder to obtain for another reason.

Usually private loans are unsecured meaning that unlike a house or a car, the bank can’t just come take your education back if you don’t pay. It’s a higher risk and therefore they will want a higher interest rate to compensate for the risk they are taking. If you do go with private loans be sure that you can easily afford the payments, and if possible pay the loan off as early as possible.

Federal grants and private loans are two very popular ways to pay for a higher education, but it’s up to you to decide what will fit your individual situation. Remember, always to for the “free money” first.


Nancy R. Ziering is from College and Retirement Solutions, LLC.