For a person with a limited income the education loan is the only way to shell out thousands of dollars just to finish the education. Thus the student loan plays an important role in fulfilling the dreams of the students and completing their education. There are two ways through which the students can get the education loan. One being the Federal Student Aid that is backed by the U.S. Department of Education and another way is to get the loan from the other lenders like the banks.

Difference between the Private loans and Federal Loans:

The Federal loans are specifically designed according to the needs of the students and there are lots of options available to the student like loan consolidation, deferment or forbearance, etc. These are more like benefits than options. The private loans on the other hand are the loans provided by the banks and financial institutions. The private loan vendors are concerned with the recovery of their amount given with interest. They might not give the benefit of deferment or forbearance. Besides, the Federal Student aid has got the backing from the U.S. Department of Education, this kind of backing is not there in the case of private loans and so no benefit is passed on the borrower.

Defaults in the loan repayments:

The private loans and Federal loan both have different ways of dealing with the defaults made in the repayment. Since the private loans policies are too strict than the Federal Loans, there have been lots of extreme actions taking by the American students just because of the rising balances of the student loans. In the case of a private lender, the default in such borrowings attracts a good amount of penalty and also in some cases it has been observed that the charges or fees have reached to the limit of 50 percent of the amount of loan borrowed. With the clause of having a security in the case of private student loan, not only the borrowers but the third party, payment guarantor also gets stuck in the loan cycle when there is a default in the repayment of loan by the borrower.

Private lenders in lawsuit:

According to one investigation done in the year 2007, it was found that the schools and colleges were directing the students to borrow the student loan from some preferred lenders who had agreed to share some benefits with such schools or colleges. The lenders charged higher charges and interest rates for the loans and shared these benefits with the colleges or schools. This way there was profit to both the schools and the lenders.