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Released: June 07, 2011

Private student loans vs. federal student loans

Source: Sandra Block, USA Today (Free Registration)

One student loan charges an interest rate of 3%. Another charges 6.8%. Which should you choose? Seems like an easy question, even if your fall curriculum includes "Math for the Liberal Arts Major." But when the subject is student loans, it's not enough to be good at arithmetic. You may also need to know some contract law. There are two types of student loans: federal loans, which are issued directly by the federal government, and private loans, which are provided by banks and other lenders. Most borrowers who take out federal student loans will pay a fixed rate of 6.8%. Students who qualify for subsidized loans, which are awarded based on financial need, will pay a fixed rate of 3.4% on loans issued after July 1. Interest rates on private loans vary, depending on the lender and the borrower's credit rating. In recent months, though, rates on these loans have dropped. In April, for example, lending giant Sallie Mae reduced rates on its private loans to as low as 2.25%.

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