Federal Student Loans Vs Private Student Loans

Paying for College and Dealing with Student Debt

Nov 6, 2009

Are you struggling to decide the best way to pay for college and avoid debt? Find out whether a federal student loan or private student loan provides the better option.

The National Post-secondary Student Aid study showed that the average student owes $23,186 upon graduation. Given that the median level of student debt is increasing with each passing year, an assessment of whether a federal student loan or private student loan is the right option is fundamentally important. This isn't simply in respect to the student loan interest rate, it is also imperative that there is an appreciation of what can be done in the event of financial difficulties. Remember that filing for bankruptcy to clear personal debt is not an option.

Federal Student Loans Vs Private Student Loans - Poor Credit History Loans for Students

Perkins and Stafford loans don't involve a credit check so they are available to all, regardless of credit history. However, a bank loan will be credit scored so it will only be available to those who have a reliable history of repayments. Not everyone has a credit history, let alone good credit, which means that a private student loan will only be available with a cosigner. This would mean that the cosigner would be financially responsible for student debts in the event of default.

Student Loan Interest Rate - Subsidised Federal Student Loans or Private Student Loans?

Perkins loans (currently 5% APR) and certain Stafford loans (currently 5.8% APR) are subsidised by the government to make education more affordable for needy families. In order to qualify for the lowest rates, it will be necessary to undergo a means test. Only a small percentage of families will be eligible. However, even an unsubsidised Stafford loan (currently 6.8% APR) will be more competitive than a bank loan so they are likely to prove more affordable over the longer term.

Federal Student Loans Applications - Lower Student Loan Interest Rate Vs New Loan Applications

Whilst a private student loan from a bank will only create the one loan account, this isn't the case for a Perkins or Stafford loan. A new account will be opened for every year that a loan is needed. Upon graduation, the student will have multiple accounts that require a separate payment. Whilst it is possible to perform student loan debt consolidation, this will disqualify that person from student debt forgiveness programs for some public sector workers. Simplified finances aren't worth making higher payments for.

Student Loan Deferment - No Reduced Student Loan Interest Rate for Most

Graduates will be able to defer repayments on their loan for up to three years in the event of unemployment or financial hardship. However, the debt will continue to accrue interest. The only exception to this rule is those who have a subsidised Perkins or Stafford loan. This is to prevent greater financial hardship for families that fall into the most vulnerable categories.

Paying for College - Perkins Loans and Stafford Loans

Federal student loans are the preferred option for anyone who qualifies, especially those who qualify for a subsidised Perkins loan. However, the amount that can be borrowed isn't always sufficient. It is normally only sensible to take out a private student loan when the money available isn't sufficient to cover costs. Those with a poor credit history are unlikely to qualify without a cosigner.

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