Choosing Federal Student Loans Vs. Private Student Loans

by bill rice on 03. Jun, 2008 in Mortgage News

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Determining whether to get a federal student loan or a private student loan can be a confusing decision. Most students and parents are facing the rising cost college education. The practical solution is to apply for a student loan. However, there are so many options and determining the best one for your situation is challenging. The most basic question though is: would I be better to with a federal student loan or private student loan?

Federal student loans or programs are offered or backed by the government. Although federal student loans often offer lower interest rates than private student loans, many experts argue that parents and students miss the benefits of federal student loans. Instead, they end up going directly to private agencies. Often the problem or disadvantage of federal loans is the low amount of loan they offer. So if a student needs a higher amount for his education, he should apply for more than one federal student loan. To avoid the hassle of applying and paying for a multiple number of loans, students can seek private agencies to assist them. This is often necessary if they intend to study at a high-cost school or university.

There are various types of federal student loans: Federal Perkins Loans, Federal Subsidized Stafford or Direct Loans, Federal Unsubsidized Stafford or Direct Loans. These loans may have different requirements and qualifications so you should review each based on your circumstance. For example, the Federal Subsidized Stafford is beneficial for those who need significant financial support and can document that need. The government pays the interest on the student loan, while the student is enrolled in the college or university. In addition to that, the interest rates will gradually lower during a typical four year program.

Students who incur federal student loans generally must begin repaying those loans six months after graduation. Private student loans are typically the same.

Often private student loans charge higher interest rates compared to federal student loans. This is often because these private student loans are offered by private agencies, without government guarantees and are therefore higher-risk and thus higher-cost. However, private student loans tend to be more popular because they are marketed much more heavily to students. Agencies also claim that it is easier to apply and qualify for private student loans because processing only takes a week or two. The biggest benefit to private student loans is the higher amount a student can borrow. If a student goes to higher-cost college or university, they may find it more practical to use a private student loan.

Student finance experts, advise parents and students to maximize their use of federal loans first and then opt for private student loans. Federal loans offer more security for the debtor and are therefore cheaper than private loans.