Private vs. Federal Loans: Which is Better?

loansCollege can be a pricey endeavor. For students without scholarships or who don’t have generous parents to fall back on, there are few options left to pay for their education. Working during school is an one option, however many degree paths don’t allow for the time commitment to hold down a job. This leaves student loans as the only viable alternative to pay for school for many students.

There are two approaches to student loans – private or federally backed. The decision will not only impact how your school finances are handled immediately, but will also affect your payments well after you graduate. How can you decide which is the best for you?

Here are some helpful tips to make the decision easier.

  • Consider Interest Rates. On paper, private student loans appear to be more appealing with their lower initial interest rate. This lower rate sounds great, but like many things, the devil is in the details. Private loans often have flexible interest rates which can fluctuate due to outside factors. This means your monthly payment may fluctuate dramatically depending on circumstances out of your control. On the other hand, federal loans aren’t tied to anything. In fact, if you consolidate your loans your interest rate will drop. Keep in mind, you cannot consolidate private loans.
  • Is There Any Protection? Graduating with a lot of debt is a gamble; you’ll need to ensure whatever income you have from your job is enough to cover the monthly payments. Federal loans give you more flexibility; you can defer your payments if you lose your job or make payments based on your income if you’re not earning enough with your current job. With private loans you won’t be so lucky, there is usually no protection for you based on your employment situation.
  • Defaulting is usually different as well. For federal student loans you can miss up to nine months of payments before they consider you defaulted. Private loans vary, but some consider you to have defaulted in as little as month. They both have one thing in common, though – defaulting on your student loans has serious consequences for your long-term financial future.
  • Consider Your Loved Ones. What happens to your loans if you suddenly died? Student loan debt is an increasingly burdensome load, but with federal loans they’ll be forgiven. You aren’t quite so lucky with private ones. Your parents or spouse could be on the hook for your remaining private loan debt, but this depends on the details of your specific loan.

Are private loans ever a good thing? Yes and no. There is certainly more downside to private loans than federal ones. However, if you’re pursuing a career which has an expensive degree path but has high employment and pay, the lower interest rates may be an appealing path. The restrictions on applying for federal loans may also mean private loans are the only option available. However, filing a FAFSA before the beginning of year is always a good idea and can provide a glimpse into what to federal loans are available.

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