Federal vs Private Student loans… which is better? Most schools, the federal government and even private lenders recommend taking out federal over private student loans. Every student gets the same competitive rate, they come with more flexible repayment plans and they offer more options for deferment, forbearance, and forgiveness.
But there are a few cases where private student loans actually make more sense. If you’re not sure which is right for you, consider these five factors.
1. Are you eligible?
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Not everyone can qualify for a federal or private student loan.
To qualify for federal loans, you must be enrolled at least half time at a Title IV school, which doesn’t include many for-profit universities and some community colleges. You also need to be a US citizen or permanent resident and over 18. This rules out international students and 17-year-old freshmen.
Private student loans also have requirements that some students might not be able to meet without a cosigner. Most have minimum income and credit requirements — two things most undergraduates generally can’t meet on their own.
But it’s possible to find a lender that’s willing to work with students who are under 18, attending a school that isn’t eligible for federal aid or don’t have the right residency status to qualify for federal aid — as long as you have a cosigner, that is. Without a cosigner, your options are considerably limited.
2. Which actually has a better rate?
Federal student loan rates have been going up over the past few years. For the 2018-2019 academic year, you could end up with an interest rate as high as 7.6% — and that doesn’t include the origination fee.
If you’re only eligible for a Graduate or Parent PLUS Loan, a private loan might actually cost less. Especially if you have a cosigner with strong personal finances — like a credit score over 750 and a low debt-to-income ratio. PLUS Loans aren’t eligible for as many perks as other types of federal loans, so you might not actually be missing out on much by borrowing from a private lender.
Private student loan rates start at 3% with no origination fee. Even if you don’t get the lowest offered rate, it could be lower or close to the cost of a federal loan with a more competitive rate.
3. How much do you need to borrow?
One of the main drawbacks to federal student loans is that there are limits to how much you can borrow for its most competitive programs: Direct Subsidized and Unsubsidized Loans. Limits depend on how long you’re in school and whether the Department of Education considers you a dependent or independent student.
The most you can borrow through the Federal Direct Loan Program as a freshman is between $5,500 and $9,500. And you’re limited to borrowing $57,500 as an undergraduate and $138,500 as a graduate or professional student.
While $138,500 might sound like a lot, it isn’t if you’re getting a medical degree or going to law school. In these cases, you might not have any other option but to borrow from a private lender — or use a combination of both.
Private lenders typically have much higher limits or allow you to borrow up to 100% of your school-certified cost of attendance.
A note about the cost of attendance
The cost of going to college doesn’t stop at tuition and fees. Schools consider what it calls the cost of attendance (COA) when coming up with your financial aid package.
Each school has different criteria for what it considers to be your COA. It usually includes housing, meal plans, textbooks and supplies, transportation and other miscellaneous living expenses.
Student loan providers are legally not allowed to let you borrow more than your school’s COA. That’s why private lenders reach out to your school to confirm your loan amount when you apply.
4. Can you afford to start paying off your loans while in school?
Federal student loans generally don’t require you to start making repayments until six months after you’ve graduated or otherwise dropped below half time — this includes taking a semester off.
Private student loans don’t always offer that luxury. Or when they do, they offer multiple in-school repayment options. These often include interest-only repayments, fixed repayments of around $25 or starting with full repayments right away.
While you might not be able to afford full repayments right away, making small repayments on your loan while you’re in school could actually help you save. You can do this by getting an internship while in college or check this list of side hustles for college students.
With the exception of Federal Direct Subsidized Loans, interest starts adding up on your federal loans as soon as your school receives the funds. When you finally start making repayments, all of that accumulated interest gets added to your loan balance — and you effectively end up paying interest on interest.
By taking out a private student loan and making small repayments early on, you could both save on your total loan cost and get out of debt faster.
5. What are your plans after graduation?
What you plan on doing after graduation is an extremely important, albeit unpredictable factor to consider when choosing between federal and private student loans.
Undergraduates planning on going to graduate school in the future might want to consider federal loans, which you can defer while you’re in school again. Not all private lenders allow in-school deferment.
Thinking about going into public service or working for a nonprofit? You could be eligible for full forgiveness after making 10 years of repayments on your federal loans through the Public Service Loan Forgiveness (PSLF) Program.
In fact, anyone considering traveling around or who thinks they might have a low-income job might want to choose federal loans over private, since they’re eligible for income-driven repayments. Private lenders typically only offer one standard repayment plan, and fewer deferment and forbearance options.
Federal vs Private Student Loans Summary
In the end, federal student loans are usually a more favorable choice. Private student loan providers even tend to recommend that you apply for federal aid first before you apply for their products.
But if you can’t qualify for federal aid, can get a better deal with a private lender or want to get out of debt as soon as possible, private loans could be the way to go.