Federal Versus Private Student Loans: Which Is the Right One for You? -


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Federal Versus Private Student Loans: Which Is the Right One for You?

A lot of people have student loans, but you must understand the difference between private and federal student loans as it could help save you money. Currently, there are over 40 million student loan borrowers who owe over $1.5 trillion in the United States. Approximately $1.4 trillion of these loans is in the form of Federal student loans and the remaining is in the form of private student loans. What exactly is the difference between these loans? Here, we will discuss the pros and cons of these different student loans.

Difference Between Federal and Private Student Loans

Federal student loans are offered by the government and they offer a fixed interest rate of 4.45% for undergraduates and 6% for graduates. On the other hand, private student loans are given by private lenders and they offer a variable interest rate of around 7.99%.

Federal Student Loans

With federal student loans, the fixed interest rate remains the same until you complete your loan payments. These rates remain fixed irrespective of the rise and fall of the market – also, most federal loans are subsidized. These subsidized loans are beneficial because the interest on your student loans is paid by the government while you defer or are still in school. Unsubsidized loans, on the other hand, accrue interest as soon as the loans are taken out.  So, what are the benefits of federal student loans?

Benefits of Federal Student Loans

  • Students can save a lot of money from federally subsidized loans before they graduate;
  • Federal student loans offer students more repayment options when they graduate;
  • There are deferment options for students who can’t make their payments;
  • Subsidized federal loans don’t add interest during deferment;
  • Federal student loans offer income-driven repayment plans for those who can’t afford to pay monthly; and
  • There are different loan forgiveness programs that students can qualify for.

Private Student Loans

Credit unions, banks, and private institutions offer private student loans – the loan offered by your university is also a private student loan. Private student loans are not offered on a need basis like subsidized federal loans. Even though the interest rates on private student loans are higher, it can go as low as 3% if you have a good credit history. Also, private student loans are used most times as a supplement for federal loans. So, what are the benefits of private student loans?

Benefits of Private Student Loans

  • Students will be able to get a higher borrowing limit with this private student loan;

  • For people who have good credit, they can qualify for a low-interest rate.

There are however drawbacks with private loans – some have variable interest rates that increase as the fed changes rates. These loans also offer less repayment flexibility unlike federal student loan. Additionally, there are no loan forgiveness programs for private student loans.

If you are shopping for student loans or you already have unmanageable ones, you could benefit from the expertise of a licensed debt counselor and attorney.  Elias Dsouza is that attorney.  Contact Elias today for a free consultation.

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