Are Federal Student Loans Always Better Than Private Loans?

0

Image source: Getty Images

Many students have no choice but to borrow money for college when they or their families do not have the funds to pay these fees in full. You have two choices for taking out student loans: you can borrow money from the US Department of Education via a federal loan, or you can borrow privately from a bank, credit union, or from an online lender.

Generally speaking, students are advised to give preference to federal loans over private loans. This is because federal loans come with terms and protections that are better for borrowers. However, there are cases where it makes sense to take out private loans.

The benefits of federal loans

The higher the interest rate attached to your loan, the more it will cost you. One of the main advantages of federal loans is that their interest rates are fixed and capped. Private loans, on the other hand, can charge whatever interest they want, and since many come with variable interest rates, students who borrow privately are often subject to unpredictable monthly payments after graduation.

In addition, federal loans are often subsidized so that interest does not accumulate on your loans while you are in school (rather the government takes care of it). Private loans are not subsidized, so once you take one out, interest starts accumulating on your principal, even while you are in school.

Federal loans also come with a number of important protections for borrowers that can make it easier to manage and repay this debt. For example, if you take out federal loans, you can apply for an income-based repayment plan if you find that you are not able to meet your monthly payments according to your original loan terms. At this point, your payments will be recalculated as a percentage of your income. Federal loans also offer some borrowers the option of temporarily deferring payments or even requesting a loan forgiveness.

Private loans, on the other hand, usually don’t have these provisions, although it’s certainly worth noting that some lenders might work with you if you ask for better terms or more leeway. For example, if you are borrowing privately and having trouble making your monthly payments, your lender might agree to reduce them. Likewise, some private lenders will allow you to defer payments for a period of time, but you may have to pay a fee for this lien. And you can almost certainly count on accrued interest during your deferral period, whereas with a federal loan it may not happen.

Finally, federal student loans are need-based and good credit is not required to qualify. Private lenders to do need good credit, and if you don’t have it, which may be the case if you haven’t established a credit history yet, you’ll need to hire a co-signer to get the financing you have need.

When private student loans make sense

Most of the time, you are better off taking out federal loans to pay for your education. But keep in mind that some private lenders offer very competitive rates for borrowers with good credit, in which case you might end up getting a lower interest rate than you would get with a federal loan. The same is true if you partner with a co-signer who has excellent credit.

Additionally, as mentioned earlier, private student loans often have variable interest rates. It can be a bad thing once those rates go up, but if you start with a low interest rate and pay off your debt quickly, you could find yourself paying less interest than you would pay on a federal loan.

Plus, private loans don’t have a borrowing limit, which means you can withdraw as much money as you need for your education. Federal loans come with borrowing limits and as such may not provide all the financing you need to cover the cost of your education.

Let’s be clear: it is almost always beneficial to maximize your federal loan options before taking out private loans. But if you to do getting stuck in borrowing privately in one form or another, all is not necessarily lost.


Source link

Share.

About Author

Comments are closed.