For many of today’s students, student loans are the only effective way to get the education you want. You want to get the best possible start in life and ensure that you have the skills and education necessary to jump into the workforce and reach your career goals–and as college tuition prices continue to rise, student loans may be your best avenue for getting there. Before you jump in with student loans, however, it’s important to consider whether federal or private student loans are the right choice for you.
What is a Private Student Loan?
When most people think of student loans, they imagine a federal loan provided by the government–and in fact, that’s the type of loan obtained by most students, since the federal government currently provides approximately 90% of student loans. Like federal student loans, private student loans are loans that you may be able to receive to help pay for the costs of your college education. Instead of being subsidized by the government, private loans are provided by banks, credit unions, and other institutions. Private loans are designed to provide students with another option when it comes to financing their educational decisions.
What’s the Difference Between Federal and Private Student Loans?
Federal and private student loans have several key differences that should be taken into account before you decide which direction you want to go with your loan needs.
Federal student loans always have fixed interest rates. While this rate may change yearly based on a variety of factors, once the loan is locked in, students know exactly what interest rate to expect. Private loans, on the other hand, can have fixed or variable interest rates. Variable interest rates can change over time, making it difficult to predict what monthly payments will look like. However, in some cases, those interest rates may be lower than those offered by federal loan programs.
Federal loans don’t require a credit check (unless you’re applying for a Parent PLUS loan, which leaves the responsibility in your parents’ hands). When you apply for a federal student loan, you’ll get the same rates and consideration as every other student applying. When you apply for a private loan, on the other hand, your unique financial circumstances and credit background will be taken into consideration–which can affect whether you are approved for the loan and the terms applicable to the loan if you are approved.
Private lenders are beginning to consider students’ future earning potential. At one point, private lenders for student loans struggled to keep up with the offers made by federal lenders. Today’s institutions, however, are beginning to understand that student loans are very different from car loans, home loans, and other types of loans. Student loan repayment is based, not on a student’s current financial status, but on their future earning potential–and many private lenders are beginning to take that into consideration when they make offers to students.
A cosigner can make it easier for you to acquire a private loan at great rates. Federal student loans don’t require a cosigner. Private loans may require a cosigner if you don’t have established credit and/or income in your own name. The right cosigner, however, can make a big difference in the rates you’re able to receive on your loans.
Federal loans offer more flexibility for repayment. The reason most students opt for federal loans over private loans is simple: federal loans offer significant flexibility when it comes to repayment. This includes:
- Deferment options that allow you to put off repayment for a period of time if student loans are causing a significant financial burden
- The ability to temporarily lower payments due to financial hardship
- Tying student loan repayment to monthly income, which can make it easier to make those payments (especially right out of college, when you may not have reached your earning potential yet)
Federal Vs. Private Student Loans: Which One is More Practical?
When it comes time to make a decision about the type of student loan that’s right for you, it’s important to consider all the different factors that play into the choice. Make sure that you ask yourself several key questions before you move forward.
What does your current credit score look like? A high credit score may make it possible for you to secure better rates through private student loans. This is particularly useful for older students who are choosing to return to school and who may have had more time to build their credit.
When would your loan require repayment? Federal loans don’t require payment until you’ve graduated–and in many cases, those federal loans won’t accumulate interest as long as you’re enrolled in at least 6 credit hours of classes per week. When you opt for a private loan, you’ll have to look into the details to get a better understanding of when repayment will be required, since many private loans require payment when you’re in school. Note, however, that this doesn’t have to be a reason to walk away from private student loans: making payments throughout your educational journey can help lower your student loan debt and help you start out in a better financial position once you graduate.
Do you have a cosigner? If you’re going the route of private student loans, a cosigner can make it easier for you to get reasonable rates. Cosigning on a private student loan is also an excellent way for parents to help out with college payments. Parents who have cosigned on the loan can help the student make payments while they’re still in school, then turn over the loan once they’ve graduated. This simple strategy is an excellent way to help reduce student debt while the student is still in school while still keeping repayment at a reasonable rate that won’t place undue financial burden on the parents.
What does your earning potential look like when you graduate? Some fields are booming, allowing students to quickly step into positions in their new field. In other fields, it’s necessary to put in your time as an intern or to work in low-paying positions for a few years before you’re able to reach that income potential. Unfortunately, that often means the time is ticking on student loan repayment while you struggle to find that key job. You should also consider what the first-year salary typically looks like in your field: if you have high earning potential in the future, but know you’re likely to struggle for a while at first, a federal loan may be a better choice for you.
Are you able to secure a federal loan? There are situations in which federal loans might not be enough to cover all of your college expenses. In this case, adding a private student loan to the federal loan you’ve already received can be the most effective way to ensure that you’re able to pay for your education.
What other options do you have for funding your education? Scholarships, help from family members, and other funding options can all help bridge the gap between what is provided by student loans and your actual expenses. Before you head to college, make sure you understand your options and how they’ll shape your financial status in the coming years.
For most students, private student loans are a last resort: the option taken when federal loans fall through or when those federal loans simply aren’t enough to cover their expenses. In some cases, however, private student loans are worth considering. Before you head to college, examine what private student loan options are available to you and how those choices can help shape your financial outlook for the future. You may be surprised by the benefits they can offer.
Making the right choice with regards to your student loans can have a significant impact on your financial future. If you need help finding the right lender for your student loans or you’re struggling to decide which type of loan is right for you, contact us! We’ll work with you to find a lender that will fit your criteria and provide you with the best possible financial start.