Federal vs Private: What to look for in a student loan

When it comes to student loans, I often hear people trying to make the case for private student loans by highlighting the “flexibility” and “versatility” of such loans compared to federal loans. While private student loans can be justified in the right circumstances, there is something to be said about the advantages federal student loans can offer student borrowers in the face of post-graduate uncertainty.

The federal government has implemented plans and programs designed to address the great financial burden student loans continue to have on student borrowers. Available to virtually all student borrowers of federal loans, plans like income based repayment, forbearance and deferment allow for the fair alignment of mandatory loan payments and student repayment abilities. Federal loans also come with grace periods, giving graduates a few months after graduation before they are expected to start making their monthly payments. But with private loans, students are often required to make payments while they are still in school.

Although not of great importance to most college-age students, taxes are treated differently under federal and private loans: federal student loans are tax deductible, where private loans are not. For those fortunate enough to exceed the monthly minimum repayment amount, federal loan student borrowers won’t be penalized for making early payments as these types of loans come without any prepayment penalty fees; this may not always be the case with private loans.

As we all know, one’s credit history is an important metric used by lenders when determining how much credit to extend to prospective borrowers whether it be a car loan, credit card, mortgage, or start-up funding. Private student loans are no different. Many private lenders will lend money based on a borrower’s or, in the case of private student loans, a co-signer’s credit history. A borrower’s credit history generally does not play a role in securing government-backed, subsidized student loans as these loans are needs-based. Although private student loans vary in cost, they are generally more expensive than federal student loans. My advice for students is to exhaust all other financial aid options before taking on private student loans when pursuing undergraduate studies.

Most government plans and programs designed to offer student borrowers a wide array of loan repayment options were enacted at least partly due to political pressure, something private lenders probably aren’t overly concerned with as they aren’t the ones seeking re-election. Having said that, the decision to take on ANY type of student loans involves rigorous research on the part of the borrower that deals with complex factors like interest rates, time horizon, chosen career path, major, principal amounts, post-graduation repayment options, etc. If you can find a private lender who can offer a fixed-interest rate with a greater degree of flexibility than a federal student loan would when it comes to terms of repayment, then it might be something to consider. However when planning for a future entrenched with years of student loan repayment, the resourceful student borrower will seek out loan terms that are more economical and allow for greater breathing room.

You can find more information on federal student aid and the options available to student borrowers at studentaid.ed.gov.