Advantages and Disadvantages of Federal and Private Student Loans

The Department of Education awards more than $ 120 billion a year in grants, scholarships and low-interest loans to more than 13 million students, according to the website studentaid.gov from the Federal Student Aid Office. Different types of federal loans are available, depending on factors such as family income and whether the student is attending an undergraduate or graduate program:

• Direct loans subsidized. These loans are available for undergraduate students who demonstrate a financial need. Students do not have to make payments during their studies or during a six-month grace period after leaving school. In addition, the government pays the accumulated interest while the student attends school at least half-time and during the grace period, as well as the interest generated during a deferral of repayment of the loan, which is allowed under certain circumstances.

• Non-subsidized direct loans. These loans are available for undergraduate, graduate and professional students. Eligibility is not based on financial need. As in the case of a subsidized loan, students do not have to make any payments during their studies or six months later. But unlike a soft loan, students are responsible for paying accrued interest in all periods.

Advantages and disadvantages: Federal student loans can have lower interest rates than private loans and offer more student repayment options. Even if the rate offered by a private lender is lower, federal student loans offer significant protections such as income-contingent repayment and loan cancellation opportunities, said Michele Streeter, communications director of the Education Finance Council. , a national professional association representing non-profit state financial institutions of higher education. "You should never replace a federal loan with a private student loan," she says.

However, federal borrowings have annual and global limits on what a student can borrow based on grade and dependent status. For example, a first-year undergraduate student who is considered a dependent can usually borrow up to $ 5,500; No more than $ 3,500 of this amount may be in the form of soft loans. The overall limit for such a student is $ 31,000, of which up to $ 23,000 may be in the form of soft loans. Federal student loans also charge loan fees, currently 1,062% for loans disbursed from October 1, 2018 to September 30, 2019.

For families who need to borrow extra money (after exhausting federal student loans, federal and state grants, college-specific college scholarships, outside scholarships, job studies and savings), there are a number of options:

Federal parental loans

• Direct Plus loans. These are federal loans available to parents of undergraduate dependent students. Interest is charged during all periods and nothing will be paid by the government. Payments of principal and interest on federal loans to parents generally begin as soon as the loan is fully disbursed, but parents can request an adjournment while their child is at least half-time enrolled and for an additional six months after completion of his studies, his exit from school or his fall. below halftime. The interest rate is 7.6% for Direct Plus loans disbursed from July 1, 2018 to June 30, 2019.

Advantages and disadvantages: Families can borrow up to the cost of participation, minus any other financial assistance they receive. In some circumstances, such as the death of a parent or permanent disability, the loan may be released. On the other hand, borrowers can not have an adverse credit history; If they do, they must find an endorser who agrees to repay the loan if they can not. In addition, the interest rate may be higher than that of some private loan options, and Plus loans charge an origination fee of 4,248% for loans disbursed from October 1, 2018 to September 30, 2019. These loans can not be transferred. to the student, which means that the parent is legally responsible for the debt.

Student Loan or Private Parent

Private loans are non-federal loans granted by a lender, such as a bank, a credit union, a state agency or a school. In this category, there are many choices.

• Large private lenders. A number of large lenders are focusing on the private student loan market, including Sallie Mae, College Ave and Discover student loans. Comparison sites such as credible.com or edvisors.com/compare-lenders can help students and families compare the options offered by these lenders and others.

• Small private lenders. This category – often overlooked by families – includes credit unions and government lenders who can offer rates and terms comparable to those of large private lenders and Direct Plus loans. To compare rates offered by credit unions, families can visit culearn.org/find-a-lender. To compare nonprofit loans from state-related organizations, families should visit foryounotforprofit.org and click on the link to find nonprofit loans. The site has potential options depending on the student's residence and the location of the school.

Advantages and disadvantages: Private lenders have the ability to determine the rates and terms of the loans they offer, most offering a choice of variable or fixed interest rates and the possibility for students to defer payments while they are enrolled in school. Many private lenders also offer parents loans with more favorable terms than a Direct Plus loan.

On the other hand, private loans can be more expensive for families with poor credit histories. The rate and amount available to borrow will depend on factors such as the credit history of the borrower, the co-signer's credit quality, if any, and the cost of the school. The conditions, rates and repayment options vary depending on the lender. Students and families must pay close attention to these details. Experts believe that families should also weigh the benefits of underwriting a secured loan, such as a net worth line of credit or a net worth loan, to cover the costs of the loan. education.

Ms. Winokur Munk is a writer in West Orange, New Jersey. She can be reached at [email protected].