Which type of student loan is best — federal or private?
Private student loans should be used only after the student has exhausted eligibility for gift aid (money that does not need to be repaid) and federal student loans.
Federal student loans are usually cheaper, more available, and have better repayment terms and conditions than private student loans. Federal student loans offer income-based repayment and public service loan forgiveness, while most private student loans do not. Federal student loans also offer more flexible repayment options for borrowers who encounter financial difficulty, such as deferments and forbearances.
More than 93% of new education loans are federal, with only 7% private student loans.
Some students do not exhaust eligibility for federal student loans before borrowing private student loans. Based on the 2011-2012 National Postsecondary Student Aid Study (NPSAS), about a quarter (24.9%) of undergraduate private student loan borrowers did not borrow federal education loans. More than half of these students did not file the FAFSA (Free Application for Federal Student Aid). Of those who did borrow federal student loans, 43.2% borrowed less than the effective total maximum.
There are a variety of reasons why students might choose to borrow private student loans instead of or in addition to federal student loans.
If a student is going to get a private student loan, he or she should shop around. Most private student loans do not have up-front pricing, so the only way to determine the cost is to apply for the loan. Interest rates and fees are based on the credit scores of the borrower and cosigner. The lowest advertised rate is not offered to all borrowers, so the actual rate for an individual borrower may be much higher and vary considerably from lender to lender. Compare private student loan options at PrivateStudentLoans.com.
There is little harm in applying for several private student loans. Applying for a private student loan does not commit the borrower to accept the loan. Applying for several private student loans will also not have a significant impact on the borrower’s credit score, since the credit bureaus now recognize shopping-around behavior in looking for the best terms and conditions on a loan.
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