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Choosing the Right Loan: Federal or Private?

While federal loans should be the initial preference for students considering borrowing options for college, private loans become necessary when federal loans prove insufficient to meet the expenses of higher education.

Before diving into your loan shopping journey, make sure you're well-versed in essential loan terms that vary across different types of student loans.

Federal Student Loans — Loans given the U.S. Department of Education.

Fixed-Rate Student Loans — The amount of interest charged on your loan doesn’t change.

Variable-Rate Student Loans — Interest rates depend on the market and can change over time.

Some students may NOT be eligible to receive federal loans because they:

• are not U.S. citizens
• are convicted of a drug offense
• are in default on a federal student loan
• don’t maintain satisfactory academic progress in college

Tailored Private Student Lending

When compared to federal loans, private student loans typically allow for higher borrowing amounts and present a variety of interest rates, fees, and borrower terms. These loans can be either variable-rate, subject to market changes, or fixed-rate. While some lenders may require students to make payments while still enrolled, many offer the option to delay payments or provide a grace period that extends until after graduation. Students are often the primary borrowers but may need a creditworthy co-signer, like a relative or friend, to increase their chances of loan approval.

Private loans usually require an established and decent credit score for eligibility. Since high school graduates typically lack credit history, a co-signer is necessary. A co-signer, with a good credit standing, takes on the responsibility of being your guarantor or financially liable during the loan's lifespan. In general, better credit scores, whether yours or your co-signer's, lead to more advantageous terms for private student loans.

The application process for private loans can vary from one lender to another. Most lenders provide the convenience of electronic applications on their individual websites. To complete the application, you will typically need to provide personal details like your name, date of birth, school information, Social Security number, and income or tax information. Private lenders often perform a credit check to determine eligibility. It is important to note that private lenders do not disclose the interest rate you will receive before completing the application. Applying to multiple lenders can help you compare and identify the most favorable terms for your situation.

Once your loan is approved, the lender will issue a letter specifying the loan's terms and conditions. To receive the funds, you must accept these terms and sign a promissory note. This note acts as a legally binding agreement between you and the lender, outlining your responsibilities as a borrower, including the repayment of the loan and any accrued interest. It is important to keep a copy of the promissory note for your own reference.

Generally, loans are directly disbursed to the school to fulfill education-related expenses, starting with tuition and fees. Subsequently, if there is any excess money, it will be allocated to cover other outstanding educational expenses. Depending on the type of loan provided by your lender, a private student loan can be utilized to pay for various necessities once tuition and school fees have been taken care of.

Loans are generally determined by the complete cost of attending a school, which encompasses expenses beyond enrollment fees. When considering a private student loan, it is vital to borrow only the necessary amount, even if you are offered more, as accumulating debt can happen rapidly and it can be challenging to recover from it.

Federal Loans: Further Information

• Federal loans often come with stable interest rates and lower costs, and in some instances, they can be subsidized, where the government takes care of interest during the student's enrollment or for a period after graduation. Completing the FAFSA is a necessary step for students to qualify for federal loan programs.
• Direct Loans are widely used federal loans, and undergraduate students can receive subsidized Direct Loans depending on their financial need and academic achievements. Unsubsidized Direct Loans are available to both undergraduates and graduate students without requiring a demonstration of financial need. The specific amount of Direct Loan funds that students can borrow is influenced by their academic level and the cumulative federal loan funds already borrowed.
• For students facing exceptional financial need, Perkins Loans can be a valuable resource providing subsidized and low-interest funds for college costs. However, it's worth noting that Perkins Loans are significantly limited, representing only around 2% of the federal aid distributed.
• Parent PLUS Loans enable parents of undergraduate students to access federal loan funds at a fixed interest rate, accompanied by higher borrowing limits.
• Students pursuing graduate or professional programs can opt for GradPLUS Loans, offering a fixed interest rate and considerable borrowing limits, typically after utilizing Direct Loans to the fullest extent.

Loan Inclusions

Student loans primarily cater to the cost of attendance, encompassing vital expenses like tuition, fees, books, supplies, and room and board. For non-essential expenditures such as computer supplies, internet services, and parking fees, private loans may provide suitable coverage.