Federal Loans vs. Private Loans
If you’re like most full-time students, you may need to consider a student loan to help pay for college. But should you take out a Federal Student Loan, or should you consider a private lender?
If you’re like most full-time students, you may need to consider a student loan to help pay for college. But should you take out a Federal Student Loan, or should you consider a private lender? Here are the points to consider before you decide:
Federal Student Loans
- Payments do not begin until you graduate, leave school, or change enrollment from full-time to part-time.
- Interest rate is fixed, often times lower than private loans-and even lower than most credit cards.
- Most undergraduate students qualify for a subsidized loan, where the government will pay the interest while you are enrolled at least a half-time basis.
- Credit check not required for Stafford or Perkins Federal Student Loans.
- No cosigner needed.
- Interest may be tax deductible.
- If you are having trouble repaying your loans, you may be able to temporarily postpone or lower your payments.
- Repayment plans, including an option to make payments based off your monthly income, are available.
- No prepayment penalty fee.
- If you work in public service, you might be able to have a portion of your loans forgiven.
- Difficult or impossible to discharge with bankruptcy.
Private Student Loans
- May require payments while you are still in school.
- Variable interest rates, some greater than 18%. A variable rate may substantially increase the total amount you repay.
- Private student loans are not subsidized. No one pays the interest on your loan but you.
- May require an established credit record. The cost of your private loan will depend on your credit score and other factors.
- May need a cosigner.
- Interest may not be tax deductible.
- Private student loans may not offer a repayment plan based on income.
- Check with lender about repayment options first.
- May have prepayment penalty fees.
- It is unlikely that your lender will offer a loan forgiveness program.
- May be possible to have debt discharged with bankruptcy
In the long run, there are more benefits to taking out a Federal Student Loan when it comes to repayment. You do not have to worry about paying it back as soon as you take out the loan, and there are usually great repayment plan options.Be sure to carefully consider all the information before deciding what kind of loan to take out.
And remember: Never take out more loans than you need, because you have to pay them back in the end!