You may have heard that student loan debt is hobbling many Americans, but did you know that not all student loans are created equal? Americans with private student loans can face variable interest rates and have a much harder time discharging their debt. In short, there are key differences between public and private student loans. Read on to find out what they are.
The College Loan Decision
With the cost of college rising ever higher, many Americans are turning to private student loans to bridge the gap between their financial aid packages and the cost of a degree. A typical financial aid package will include some subsidized or unsubsidized federal loans, and maybe some grants or scholarships from the college. Federal student loans are a great resource for students and their families, but they might not cover the entire cost of your education. That’s where private student loans come in – but there’s a catch. Public student loans (also known as federal student loans) are considered the more desirable form of student debt. Why? Because of these four factors.
1. The subsidies
Some federal student loans are subsidized by – you guessed it – the federal government. The government also keeps an eye on public student loans to make sure they have protections for borrowers. Private student loans (the ones that aren’t federal) are run by banks and other lenders. We’re not saying they’re out to get students, but they don’t have the same sense of obligation to the students who borrow from them. That’s why the Consumer Financial Protection Bureau has an ombudsman whose one job is to police the private student loan market.
2. The interest rate
Federal student loans, particularly for undergraduates, generally come with lower interest rates than private student loans. There. We said it. Private student loans are a big business, whereas public student loans are meant to serve as a public resource for students who want the benefit of higher education without taking on a hefty debt burden. That’s why Congress sets the interest rate for federal student loans.
There’s another important factor when it comes to interest rates: interest rates on private student loans are often variable. That means your payments can increase unexpectedly. Not fun. Federal loans, in contrast, always come with a fixed interest rate.
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3. The re-payment schedule
Federal student loans (with the exception of PLUS loans for parents and graduate/professional students) give you a six-month post-college grace period before you have to start making payments. That’s not usually the case with private student loans. In general, public loans come with more flexibility as to the repayment schedule and more options for income-based repayment. With private loans, it’s harder to negotiate a postponement of payments in extenuating circumstances. Plus, with private student loans you’re on the hook for making payments as soon as you start college, whereas with subsidized student loans you don’t pay while you’re in school. Which brings us to factor 4…
4. The forgiveness factor
In recent years, it’s become much harder to get out from under student loan debt. Gone are the days when a person could easily discharge student debt in bankruptcy. Even federal student loans can get pretty real. Fail to keep up with your payments and you could find yourself with garnished wages. Or, Uncle Sam might decide to keep your tax refund and, eventually, your Social Security check. While the overall atmosphere has gotten more unforgiving, there are still differences between federal and private student loans. In short, private student loan providers are less flexible and less forgiving.
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So, are private student loans worth it?
Now that we’ve gone over some of the important differences between federal and private student loans you may be wondering if private student loans are worth the risk. The answer? It depends. With so many options for private student loans, from undergraduate loans to private graduate student loans, it’s important to understand that there’s a lot of variety in the market.
Some private student loans have variable interest rates, which makes them riskier, but others have fixed rates. If you have excellent credit you may qualify for a fixed-interest loan that is affordable to you. Particularly for graduate students, this might be cheaper than your federal options. Keep in mind, though, that by choosing private college loans you’re missing out on the flexibility, forgiveness options and income-based repayment benefits described above.
Here’s some advice if you’re considering private loans. First, exhaust your federal options. Second, compare the private student loan rates that are available to you. Third, read private student loan reviews for loans and lenders you’re considering. Fourth, take a hard look at the degree program and school you’re interested in. What are its graduation, job placement and loan default rates? Is it worth the debt you’re considering?
Armed with the information above, you can make an informed decision about financing the high cost of higher education for you or your child. You can see why the general wisdom is to aim for federal student loans before resorting to private ones. Still, those with excellent credit may find a deal on private student loans that works for them.
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