Federal Vs. Private Student Loans: Which One Can Help You Find Financial Freedom?
The world of higher education financing can be, to put it mildly, complicated. One of the biggest choices that you are going to have is deciding whether (or not) to fund your education with federal student loans or private student loans. Although both paths provide routes to pay for your schooling, knowing the differences will help you make choices that will neither tie up your future nor weigh it down.
Federal student loans: The government-backed fall-back option
For many students, federal
student loans offer a stable and usually more affordable means of financial
aid. This implies few unique advantages:
· Steady Interest Rates:
Federal loans generally come with a fixed interest rate, so you are protected
from changes as is the case in private loans.
Income-Related Repayment Plans:
These lower your monthly payments according to what you earn and the size of
your household, making it more manageable to pay back. 1
· Loan Forgiveness Programs:
You may be able to have some or all of your student loan debt forgiven if you
work in the public service field, or as a teacher, for certain periods of time.
· Subsidized Loans: The
government pays interest while the student is in school and during grace
periods for some qualified students.
Private Student Loans: A Stricter Road
Options in private student
loans, from banks, credit unions and online lenders are also a possibility as a
last resort, particularly for those who have hit the cap with federal loan
limits or find themselves needing something more intensive due to individual
conditions. Nonetheless, you need to emphasize the risks it brings:
Variable Interest Rates : The
interest rates on many private loans are variable and can increase over time,
making it a more costly option overall.
· Less Borrower Protections:
Unlike federal loans, private loans typically do not come with the same
borrower protections like income driven repayment plans or loan forgiveness.
Making the Right Choice
You should always start with
federal student loans, but at some point you will need to go private. Here are
a few things to consider when making your decision:
Federal Loan Limits: You maxed
out your federal student loan limits; private loans help fill the gaps.
A Credit rating: Private loans
have pretty good terms, if your credit is decent or you come with a cosigner.
Loan Repayment Plans: Be realistic
with your financial situation and choose a loan that has an affordable
repayment schedule in terms of what you expect to earn versus how you want to
live within the next few years.
Debt Relief Through Loan
Forgiveness: Starting down public service or teaching path? There are many
federal loans that can be forgiven to make your debt much more manageable.