Federal Student Loans vs Private Loans: Things to Keep in Mind

BY KIRSTIAN KRISYK

With the costs of education being higher than ever and continuing to grow, few students have an opportunity to fully pay their way through college or even have their parents do it for them. If you don’t want your parents to go broke for your sake or to take a reverse mortgage on their house to pay for your degree, you have to think about ways of finding extra resources. And one of the most obvious ways to do it is a student loan. However, there is a question: what is better, a private or a federal loan? The answer, as usual, is: it depends on your situation. So let’s take a closer look.

The main difference

Federal loans are funded by the government and have strictly fixed terms and conditions: what you can use the money for, what your interest rates are when you have to start making payments. Usually, they come with a grace period, postponing your first payments until after you graduate.

Private loans are funded by private organizations (banks, credit unions, even schools themselves) and can have a wide variety of conditions. Most of them are more expensive than federal ones, and many have you start paying them off while you are still in school.

Why not just choose a federal loan, then?

At a glance, it may seem that federal loans are better by any measure – and normally you should look for them before applying for a private loan. However, it is not as clear-cut as this. Firstly, federal loans come with a cap and are often just not enough to cover the tuition costs, forcing you to look for other sources. You can take only a limited number of them. Finally, they strictly limit what you can spend the money on – normally it is just tuition and education-related expenses, and your definition of this term may differ from that of the lender. This is where private loans can help you scrape up the necessary cash to cover the expenses not included in your federal loan – e.g., relocation to your first place of work or living costs.

What to keep in mind

Be careful when determining the terms of repayment

Federal loans allow you to choose very extended repayment periods, up to 30 years. This way you will have to pay only a small amount every year, compared to a shorter repayment, but you should remember that you will pay much more over the lifetime of your loan. Thus, if you believe you can afford it, you should try to choose a shorter term.

Take your starting salary into account

Don’t take on debt that is more than your expected first year’s salary. Calculate how long it will take you to repay it and try to make it 10 years or less.

Start with federal loans

Federal loans usually offer better and more lenient terms than private ones but are limited. Start looking for available options among them, and only move on to private loans after you maximize your federal loans.

Shop around

In order to find out the exact rate you are going to get from each lender, you will have to apply for a loan. The advertised price may come hand in hand with additional conditions that make it unacceptable in your case. Get in touch with a number of lenders before settling for any of them.

A student loan can give you the means of getting an education of your dreams – but if you do it wrong, you can end up with more debt than you can handle.

BY LINE–Kristian Krisyk had been working in the field of web design for 7 years before becoming an entrepreneur in 2014 in design and marketing. His professional interests and hobbies defined major topics of his articles. These days Kristian runs his business and looks for new development opportunities. Follow him @KristianKrisyk or contact at kristian.krisyk@gmail.com