I am starting at college soon. My parents and I are still trying to determine if we should borrow money for college. We’re confused by the differences between federal, college and private loans. Any suggestions as to which type of loan is best?
It is best to borrow as little as possible for college. Budget before you borrow. Try to borrow only what you absolutely need. Do not treat loan limits as targets. Every dollar you borrow will cost about two dollars by the time you repay the debt. Before you spend student loan money on anything, ask yourself if you’d still buy it at twice the price. Live like a student while you are in school, so you don’t have to live like a student after you graduate.
But, if you must borrow to pay for college, borrow smart.
Do not assume that just because a loan is labeled as a need-based loan that it is necessarily lower cost than other options. Need-based loans are often subsidized, which yields the equivalent of a zero percent interest rate while the student is in school. But, some institutional need-based loans offered by the college as part of the financial aid package may have a higher interest rate than some private student loans and may offer less flexible repayment terms than the federal student loans.
The primary differences between different types of education loans, besides the source of funding, are in the cost, eligibility criteria, loan limits and repayment terms. There may also be differences in who is obligated to repay – the student and/or the parent – and in cosigner and collateral requirements.
The comparison of loan options chart provides a detailed list of the most important differences between federal student and parent loans and private student loans.
For many families, the cost of the loan matters most. The cost will depend on the interest rates and fees of the loan, as well as any loan discounts. Watch out for several pitfalls that can affect the cost of the loans and make it difficult to compare borrowing options:
Generally, students should borrow federal first, as federal student loans are cheaper, more available and have better repayment terms. Parent loans and private student loans may be options when a student has exhausted the federal student loan limits. But, needing to borrow from the Parent PLUS Loan program or private student loans may be a sign that the student is over-borrowing. Total student loan debt at graduation should be less than the student’s expected annual starting salary, and, ideally, a lot less.
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