Choosing Between Private or Government Student Loans
With many types of student loans and lenders to choose from, it could be difficult to decide which one to avail. There is the PLUS loan and the Perkins Loan. There is both the subsidized and the unsubsidized Stafford Loan. There are also lenders like Citigroup and Sallie Mae. With such variety, perhaps you already know by now that not all student loans are the same. But how would you know which of these loans will work best for you?
One way to make your selection process much easier is to divide student loans into two categories: private student loans and government student loans. Below are some information on these two categories of loans along with their respective advantages and disadvantages.
Let’s start with private student loans. This option is widely known as an unsecured personal loan. They work more like a credit card, only they have a one-time spending limit and marginally better interest rates. Among its advantages would be that there is no limit to the total amount of private student loans, this only means that you can get as much money as you need to cover your college expenses. These loans are not based on needs, so even if your family makes a good income, you can still be eligible.
However, there are downsides to private student loans as well. For starters, whether you will be eligible for these loans or not, it all depends on your credit score. With our present economic condition, you probably need no less than 700 FICO score to meet the requirements. At the same time, you might be required to have a cosigner (whose FICO store must also meet their high standards). Compared to federal student loans, private student loans have higher interest rates as well. The repayment terms are more restrictive, and there are fewer lenders willing to offer private student loans due to our current financial climate.
Now let’s talk about government loans for students or what is also known as the federal student loans. Historically, this type of loan was first given by the federal government in 1958 through loans from the US Treasury. But in 1965, student loans from the federal government were given through a program known as federal family education loan or FFEL. At present, federal student loans are channeled through private lenders, like Sallie Mae. With this student loans from the government, you will not be required to have a cosigner because the government will guarantee your loan. The congress sets the interest rates, which are much lower than private student loans. It’s most advantageous as well because the eligibility is based on financial needs and not on your credit history, and because the repayment terms are more varied and more flexible. Should you suffer from a personal financial crisis, the government student loan offers more flexibility and allows you to put loans on deferral or in forbearance.
Despite the seemingly attractive structure of federal student loans, it has disadvantages as well. First, it is the congress that will set the amount you can borrow, so you cannot expect the loan to cover all your college expenses. In cases of defaults, remember that the federal government has all the power to retrieve its money, and this includes garnishing your federal tax returns and your wages.
Before applying for a student loan make sure you study both the advantages and disadvantages of each type of loan. Some of the things you need to consider are interest rates, incentives, payment options and origination fees. Only then will you be able to know which student loan is best tailored for you.