Q: What's the difference between federal student loans and private student loans?

A: Private student loans are unsecured loans for the specific purpose of college tuition. Just as with other types of unsecured loans, if you fail to pay on time, your credit rating will suffer, and eventually, you can be sued. However, unlike secured loans -- such as a mortgage -- the lender cannot repossess an underlying asset, since there is no underlying asset. This makes the loans riskier for lenders, and thus, to compensate them for the added risk, you have to pay a higher interest rate.

Federal student loans are different. They are originated by the Student Loan Marketing Association (SLMA, more commonly known as "Sallie Mae") and are backed by the federal government. Federal student loans are still unsecured, but this government backing makes them much safer for lenders. For example, if you don't pay, you will suffer the same consequences as you would with private student loans, but in addition, the government can take actions to make you pay -- i.e. withholding a tax refund or even garnishing your wages or attaching your bank accounts. Because there is less risk to the lender, federal student loans have lower interest rates than private student loans. However, it is important to note that SLMA loans are not "from the government" -- Sallie Mae is a publicly traded corporation (ticker: SLM) which bundles government-backed student loans into securities which it sells to investors -- at a profit.

Other Student Loan Consolidation FAQ's Related Student Loan Consolidation Articles
Begin Online or Call 1-888-439-5454

Find the Right Debt Solution
Start With a FREE Debt Analysis

1. Which of these best describes why you are
    in debt?

2. What types of debt do you have?
    (please check all that apply)
img
Please Note: Unsecured debts are debts such as credit cards, personal loans, lines of credit, store cards, medical bills, and utility bills that are not secured by collateral. Mortgages and car loans are NOT considered unsecured debt.
Privacy Policy | Terms & Conditions | Sitemap | © 2004-2009 Triad Media Solutions, Inc. All Rights Reserved.