These days, it’s extremely difficult to obtain a college degree without racking up some amount of student debt in the process. But not all loans are created equal. As a student, you have the option to take out federal loans, which are those funded by the U.S. government, or to take out private loans, which are made by banks, credit unions, and some state agencies and universities.
While some students have no choice but to resort to private student loans, federal loans offer a number of benefits that are hard to beat. Here are a few to consider when weighing your borrowing options.
1. Lower interest rates
The higher the interest rate attached to your loan, the more expensive that loan will be. The great thing about federal loans is that their interest rates are regulated, and as such, they tend to be considerably lower than the rates attached to private loans.
Federal loans also come with fixed interest rates, which means that the rate you start out with is the same rate that will apply to your loan until it’s paid off. Private loans, on the other hand, often come with variable rates that can change over time, making it difficult for you to work your monthly payments into your budget.
Keep in mind that private loans can, in some cases, start out with low interest rates that are competitive with, or even more favorable than, those charged by federal loans. But because those rates tend to rise, private loans can wind up being more expensive nonetheless.
2. No credit requirements
If you’re applying for student loans during or directly out of high school, chances are you don’t have much of a credit history. As such, your credit score isn’t likely to be all that high, and that could be a problem if you take out private loans.
Private lenders require proof that you’ll be able to pay back your debt, and if your credit is poor, you may be forced to get a cosigner, like a parent, which puts that person on the line. Not only that, but with private lenders, you’ll often be penalized for having a low credit score in the form of a higher interest rate.
The great thing about federal loans is that they don’t require a strong credit history. In fact, the only type of federal loan that involves a credit check is a PLUS loan, which means you may have a much easier time qualifying -- and you won’t need a cosigner, either.
Some federal loans are subsidized, which means the government takes care of the interest on those loans during certain periods, such as when you’re in school, during your loans’ grace period, and during periods where you defer your loans post-college (more on that in a minute). Private loans generally aren’t subsidized, which means you’re perpetually accruing interest that can cost you a bundle.
4. Borrower protections
Federal loans come with a number of borrower protections that can come in handy if you find that you’re struggling to keep up with your debt. For example, if you take out federal loans for college, you might qualify for an income-driven repayment plan, where your monthly loan payments are calculated as a reasonable percentage of your income, as opposed to a rigid amount that eats up too much of your earnings for comfort. Furthermore, you might also qualify to defer your loans for a period of time if you experience a financial hardship that leaves you unable to make any sort of payment toward your debt.
Private loans, on the other hand, don’t usually offer these protections, though some do. However, you might pay a fee to defer your loan payments, thereby negating part of that benefit.
Are federal loans the best bet for you?
There are plenty of good reasons to stick to federal loans when borrowing money for college. That said, one drawback of federal loans is they come with borrowing caps, so you may not get all of the money you need from them to cover your college costs. Once you’ve exhausted your federal borrowing options, you may have no choice but to turn to private lenders to make up the difference. And while you won’t get all of the benefits associated with federal loans, there are some affordable student loans out there that are worth looking into.