Choosing The Best Student Loans: Federal Vs. Private

Written by: April Lunar
05/20/2019

student-loans

Taking out student loans to pay for school can seem like an overwhelming task.  You’ may be just starting out in the world and have no idea what career you want to pursue, let alone how you’re going to start paying back your student loans once you graduate.  There’s no need to worry about your future as long as you take the time to look at what your options are.  It may be tempting to go with the quickest and easiest option, but if you put in just a little effort then you give yourself the best chance for success.

Federal Student Loans

There are two types of student loans: federal and private.  In order to apply for a federal student loan, you have to fill out a Free Application for Federal Student Aid (FAFSA) form and deliver it to your school’s financial aid department.  Once completed, you can get a better picture of the options available to you based on whether or not you demonstrate a significant enough financial need.

There are several types of federal student loans, including:

Direct Subsidized Loans.  These loans are reserved for students who demonstrate financial need.  Only undergraduates are eligible, and your interest is paid for you while you’re in school.

Direct Unsubsidized Loans.  Both undergraduate and graduate students are eligible for these loans, and you don’t need to demonstrate financial need to qualify. You do need to pay the interest that accrues while you’re in school, although you can choose not to pay it until after you’re done.

Direct PLUS Loans.  These loans can be used to pay for educational expenses outside of tuition, housing, and books.  They do require a credit check, and undergraduates must have their parents sign on their behalf.

Student loans from the federal government are almost always the better option for several reasons:

Fixed Interest Rates.  When you take out a student loan, you’re given an interest rate.  This is the percentage of the total loan amount that you have to pay back on top of the initial loan amount.  Loan rates are either fixed, which means that the interest rate you’re given at the beginning of the term stays constant; or they’re variable, which means that they can change over time depending on the prevailing market interest rate. The fixed rate of federal student loans is usually lower than private student loans.

Flexible Repayment Plans.  Federal student loans offer repayment plans that are usually much more flexible than those of private student loans, allowing you the option to make payments that fit your income level.

Deferment and Forbearance.  If you suffer from financial hardship, federal student loans give you the option of applying for deferment, where you stop making payments for a period of time while the government pays your interest; or forbearance, where you stop making payments but your interest continues accruing.

Loan Forgiveness.  Students who join the military, go into certain public service careers, or volunteer with certain organizations have the option of having their federal student loans forgiven.  The government also offers loan forgiveness in the case of death or permanent disability.

There are also some downsides to Federal Student Loans, such as:

Limits On How Much You Can Borrow.  Whereas private loans typically allow you to borrow as much as you want, most federal student loans put a limit on the amount you can borrow per year.

Loan Origination Fees.  Most federal student loans have a small origination fee, with Direct PLUS having the highest.

When looking into student loans, the first thing you need to do is apply for anything and everything that doesn’t require repayment.  This includes any grants or scholarships that you may be eligible for.  After this, see if you qualify for Direct subsidized loans to take advantage of the ability to not pay interest while still in school.  If you don’t qualify, use unsubsidized loans.  If you need additional student loans on top of that, Direct PLUS loans can help cover the rest.

When paying off federal student loans, prioritize the loan with the highest interest rate first and go down from there.  This way you’ll be sure to keep interest from compounding at too high a rate and you’ll end up paying less overall.

Private Student Loans

Private student loans may still be a lucrative option in some cases, especially if you have additional expenses that federal student loans don’t fully cover.  Here are some of the benefits of private student loans:

Easy Application.  Applying for and receiving private student loans is much faster and easier than filling out a FAFSA.  The application process is much simpler, and the funds are immediately disbursed upon approval.

Less Limit On How Much You Can Borrow.  With private student loans, you can usually borrow as much as you need.  You can also use the loans to pay for a wider variety of educational expenses than some federal student loans.

There are also several downsides to private student loans, such as:

You Need Good Credit.  You cannot get a good deal for a private student loan without good credit, and most undergraduates don’t have any credit at all.

Variable and High Interest Rates.  Interest rates may start slightly lower, but they are variable and usually end up costing more in the long run.

Repayment May Not Be Flexible.  You may have to start repaying your loans while you’re still in school, and you aren’t guaranteed the same types of flexible repayment plans or loan forgiveness options that come with federal student loans.

If you choose to take out a private student loan, make sure you shop around and compare lenders. Look at more than just the interest rates- what are the origination fees?  How long is the grace period?  Do they offer deferment?  Are there any borrower rewards?  But most importantly, make sure you or your cosigners have good credit, because without good credit, your interest rates will be through the roof.


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