Student loans are not one-size fits all – make an informed decision

There are big differences between federally-backed student loans and private loans; a bit of research can save borrowers thousands of dollars.

Many people assume that student loans are basically all alike, but by spending a few hours researching their options, borrowers can potentially save thousands of dollars.

Student loans can be loosely placed into two categories: federal and private. Federal loans are applied for through colleges and universities, while private loans are applied for through individual lenders. Federal loans are needs-based, but private loans are not. Federal loans do not require a co-signer or credit check (other than PLUS loans), while private loans often do. Federal loans are disbursed directly to the school, although students will receive a check for the unused portion (usually shortly after the last add/drop day of each semester). Private loans are paid directly to the borrower.

But the differences do not stop there. Below are other key differences to consider when choosing funding to pay for post-secondary education.

Borrowing Limits
Federal loans have borrowing limits based on one’s year in school, as well as undergraduate and graduate lending caps. Private borrowers, though, can borrow any amount up to the total tuition rate.

Interest Rates
Federal student loan interest rates
are locked in as of the date of the loan and are set by law. While the interest rate for subsidized loans is currently 3.4 percent, it is scheduled to increase to 6.8 percent as of July 1, 2012. Private loans have a variable interest rate which is usually significantly higher than the federal rate; interest rates will change over the life of the loan, meaning loan payments will change.

Repayment Terms
Federal loans typically enter repayment status six months after the borrower has left school, whether they’ve graduated or not. The first payment on a private loan is generally due 60 days after the loan date. Federal loans also have a variety of repayment terms that one can alternate between throughout one’s life based on income and various hardship situations. While a private lender might agree to lower payments for hardship, they don’t have to do so. 

Loan Consolidation
Federal loans
can be consolidated together, as can private loans.  But consolidating the two is a tricky matter. Private loans cannot be consolidated into a federal loan, but federal loans can be consolidated into a private loan (but then the borrower loses the benefit of the probably lower federal interest rate). Also, consolidation can be done only in the name of the person who is primarily responsible for it, a loan taken out by a parent cannot be consolidated with loans taken out by the student, and the parent will always be legally responsible for its repayment.

There is no easy answer as to which student loan is better for a given student, but careful research will make the difference between affordable payments and a lifetime of financial struggle.

For more information about how to fund a student’s education, see "Student loans are a cents-ible way to fund post-secondary education."

For more information about student loan forgiveness, see ""Public service student loan forgiveness can save borrowers big bucks." 

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