Per the US education department, 90 percent of borrowers take out student loans from the federal government.
Those who can’t get federal student loans or are short in their needed financing turn to private student loan lenders for aide.
According to LendEDU, 1.4 million Americans owe student debts from private lenders.
Indeed, education funding has become one of the most significant burdens of the modern American.
Unless your parents saved enough for your college fund, you have little to no choice except to borrow.
Many financial experts advise students to try to get scholarships and any other forms of institutional aide before considering private financing.
But why the antagonism against private student loans? What differentiates a private student loan program from its federal counterparts? Which is the better option?
Let’s dig into the details.
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The federal student loan network is comprised by lenders who are affiliated with the federal government. They offer loan programs that are funded by the US Department of Education.
These programs are often flexible in terms of payment options and come with lower interest rates which are set by the federal government.
One of the most appealing features of federal student loans is the availability of income-driven payback plans, a commonly-preferred program among many student loan carriers.
Meanwhile, private student loans are funded by banks and other private financial institutions including credit unions.
Private student loan interest rates are set by the lenders, and are thus often higher than federal student loan rates. They are also often less flexible that your federal student loan options.
Who sets the rates
Because they are funded by the federal government, federal student loan interest rates are set by the benchmark rates of the Federal Reserve.
With a federal student loan, there is no fluctuation of payments as they are fixed throughout the entire life of the loan.
On the other hand, private student loan interest rates are set by the lenders depending on various economic factors. They can also be structured as fixed or variable which means your monthly payments may change after a predetermined time period.
Acquisition
Credit history does not affect a borrower’s chance to get federal student financing. They only need to fill out the Free Application for Student Aid (FAFSA) to apply and pass the needed requirements.
To get a private student loan, you need to establish good credit. If you think your credit may not suffice, you may have to ask the help of a cosigner. Your cosigner will be the one to pay your loan if you are unable to pay it back yourself.
Loan repayment
A federal student loan only becomes due six months after you graduate.
Typically, you are given up to 25 years to pay off your full loan balance, although 10-year repayment plans also exist.
With private student loans, you can begin repayment even when you’re still in college, although it is allowable to defer payment until after you graduate.
Length of repayment is dependent on your loan terms and the schedule of repayment is less flexible compared to federal student loans.
Forgiveness
Both federal and private student loan programs have the option for their borrowers to reduce their monthly payments. However, only federal student loans offer forgiveness.
With a government student loan, you can defer payment for a maximum of three years and there is a possibility that your loan can be forgiven if you work in public service.
A private student loan, as has been stated, cannot be forgiven but if you are having difficulties with paying them, monthly payments can be reduced by refinancing.
Refinancing allows you to consolidate your debts into one, with a lower interest rate. But refi options can be limited per eligibility.
The bottom line
A good understanding of the major student loan programs can help you decide which path to take to finance your education. Bottom line is, utility is really relative to need. Know what you can qualify for and do thorough research before making further steps.
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