Students heading to college in the fall are now lining up their funding sources in anticipation of the tuition bills that come due in August. Many will be taking out student loans and a popular question is "which is better -- federal student loans or private student loans?"
Federal loans are federally guaranteed fixed rate loans that include Stafford, Perkins and PLUS loans (for parents). Private loans, as their name suggests, are offered by private lenders like your local bank or credit union. These private loans are offered based on the borrower's credit history and have variable rates.
A few years ago, during the credit crisis, private loans just about evaporated and many students were left scrambling to find loan money. Now, private loans are becoming more prevalent and some lenders are even dropping rates to attract students. A group of 150 credit unions that have formed the Credit Union Student Choice program offer private loans at a rate of 6.25 percent and the Pentagon Federal Credit Union offers a variable rate of 5.5 percent.
However, the general rule of thumb is to make full use of any federal loans you can obtain. The big advantage is that the interest rates on federal loans are fixed. Currently, the rates on subsidized Stafford loans (available to students showing a financial aid need) are just 4.5 percent. Unsubsidized Stafford loans (which are not need-based) are available with a rate of 6.8 percent and PLUS loans are available at ther rate of 7.9 percent.
Federal student loans also offer a lot more flexibility when you are in the repayment phase of the loan. If you encounter financial difficulty once you graduate and are having difficulty making your payments, you can apply for a payment suspension for up to three years. Also, there are lots of programs that forgive the balance remaining on student loans if the student works a minimum number of years in a public service job. There are no such programs available for private loans.
A recent Wall Street Journal article reported that two thirds of 2008 college graduates had student debt and that the average debt amount was $23,200. However, student debt that approaches six figures is not uncommon. When you are talking about debt at that level, it is important to give a lot of thought to your best funding options.
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