Federal Student Loans or Private Student Loans – What to opt?
It would be great if grants and scholarships could cover all of the tuition fees of students. However, most of the students, especially adult learners, sometimes need to get either federal student loan or private student loan. Why? Well, because we often find a gap between the amount we can get from scholarship programs and the amount we actually need for college expenses.
In this case, student loans can help. There are two most common types of student loans – Federal Student Loans, which are backed by the federal government and Private Student Loans, which are issued by banks and other private lenders. In most of the cases, federal loans are a better deal for students, when it comes to choosing between the two.
The key difference between federal and private student loans is how they charge interest. All federal loans, written after July 2006, have a fixed-interest rate which means that the rate you are quoted will not change for the lifetime of the loan. In contrast, private loans typically carry varible interest rates. There is no legal limit to the interest rate that private lenders can charge you.
If you're a student and thinking of taking a loan, it's best to try your luck at getting a Federal Student Loan first. Federal student loans are guaranteed and regulated by the U.S. government. They are cheaper and have fixed interest rates which are lower than most private student loans. In addition, they're more easily available. There are three types of federal student loans – Stafford Loans, Federal Perkins Loans, and PLUS Loans. In federal student loans, the fees plus the rates of interest are regular and do not differ by loan provider. Unlike private student loans, many federal student loans do not require a credit check. To get access to these loans, you have to complete the FAFSA (Free Application for Federal Student Aid).
Most of the people think that if federal student loans are so great, then why would someone take out a private loan? The fees and costs of colleges have increased well beyond the limits of federal loans. They have a cap of $27,000 over 4 years for the dependent students and $45,000 for independent students. According to College Board, tuition alone for the average public university costs $26,300 over 4 years, whereas the average private university costs $100,500. Private loans, making up 23% of the student loan market, fills the breach between the bill from Bursar's office and the federal loan limit.
Therefore, after you have exhausted from various options of federal loans, you can consider private student loans as an alternative funding source. The private students loans aren't subsidized by the government and hence are not regulated as closely. These loans may have variable interest rates and fees based on the credit profile of the borrower and borrower's co-signer. And hence, it's adviced that students should always maximize their federal loan option before using private student loans.
