Applying to colleges is stressful enough without having to worry about financing options. However, unless you’re lucky enough to be attending college debt free, it’s important to set aside the brochures and class lists long enough to consider whether private or federal student loans are best for you. Both methods have their pros and cons, so listen closely. The type of loan you choose could determine your financial health after graduation.
Things to Consider
Before you analyze the benefits of private and federal student loans, ask yourself a few questions. After all, the right loan for you will match your credit strength, financial security, and prospects.
- How is my credit? Do I have a strong cosigner to help boost my appeal?
- What is my enrollment status? Am I full-time, half-time, or just taking a class here and there?
- What are my options for paying back the loan after I finish? Are there strong employment prospects? Am I receiving help from family?
- Will I have the financial security to pay the loan off quickly?
As you’ll see when you look at our pros and cons, your answers to each of these questions could help you decide which loan type best suites your needs.
Private student loans are provided by a private institution, such as a bank, private school, credit union, or other financial organization. As such, they can be more difficult to get and can sometimes be costlier. However, there are some legitimate reasons for choosing a private loan over a federal one when applying for a loan.
- Low interest rates come with good credit. If you know your credit is stellar, consider private student loans for the best possible interest rate.
- Best for non-traditional enrollment statuses. Federal student loans typically only cover half-time or more. If you’re only taking two or three classes a year, you should look to private student loans for help.
- You’ll need a credit check and, in some cases, a cosigner. Private companies don’t like too much risk, making these loans more difficult to land. But if you’re credit is good, this won’t be an issue.
- Interest rates can be variable. This means they could be very good (better than those associated with federal student loans). It also means you could be looking at interest rates close to 20%.
- Interest is not tax deductible. Because you’re not borrowing from the government, they aren’t interested in cutting you any slack.
- They may start asking for repayment before you finish with your degree program. Imagine still being in school and being hit with a student loan bill worth about ten of your biology textbooks.
- Prepayment may come with fees. Private institutions make money off your loan through interest. If you pay the loan off too quickly, they’ll lose out. That’s why some of them make up the difference with fees.
Federal student loans are funded by the federal government. The government has a vested interest in having educated and productive members of society, so they’re willing to take on a bit more risk than do private organizations. Basically, they are less discerning in who they fund and typically offer lower interest rates.
- No credit checks required for a federal student loan. If your credit is poor or nonexistent, then this is the way to go.
- There’s no need to repay them until after you graduate. Federal student loans will never ask for repayment while you’re still in school. In fact, they typically give you about six months after you graduate before payments start.
- Some federal student loans are subsidized. If you qualify, the government will help you reduce student loan debt by covering your interest.
- Interest is tax deductible. Save a little money on the back end by claiming your student loan interest on your taxes.
- Federal student loans don’t have prepayment fees. The government is not looking to profit off of you in the same way a private organization might.
- Federal student loans are only available for half-time or more students. If you’re going to school for less than half the time, you likely won’t qualify for a loan.
- Interest is low but not that low. On average federal loans will cost you less. However, if you have the credit to earn it, private loan interest rates could be lower.
Which is right for you?
At first glance, it appears that federal student loans are your best bet. However, there are situations where you should seriously consider a private student loan. Remember to ask yourself the questions listed above when applying for a loan and seriously scrutinize your options for paying off debt. This is your education. You only get to fund it once.