When it comes to investing in your education it’s definitely going to be a good step, but it can definitely be an expensive one.
That’s why so many people are getting student loans. They want to make sure that they have the money that it’s going to take to get that education.
But you’ll also have a choice between private and federal loans.
Federal Vs Private Loans
The two main forms of student loans that you’re going to find are federal and private.
A federal loan is actually directly from the U.S. Department of Education while a private loan comes from a financial institution.
When you get a federal loan it’s actually financial aid and you must fill out the FAFSA form each year in order to be eligible.
You’ll also need to pay back any money that you get through this method, and you’ll be paying interest on that money as well.
What’s great about this is that anyone can borrow money because there’s no credit check.
Instead, you just agree to the terms (which are the same for everyone) and you’re given the money that you need in order to pay for your schooling.
If you get a private loan you’re actually going to work with a bank or credit union or some other type of financial institution in order to get the money.
You’ll generally need to have credit in order to get these and you may need to fulfill some other specific requirements as well.
Not only that but you’re usually going to pay higher interest, which can be a downside for most borrowers.
The upside is that you can usually borrow as much money as you want.
For those who are eligible, unsubsidized federal loans are usually the best way to go because they give you no interest until after the grace period.
A subsidized federal loan is usually the second choice, giving you higher amounts for your loan but you won’t be able to get the benefit of no interest.
This is still going to be better than most private loans, however.
What’s a Sallie Mae Loan?
If you’ve ever heard of Sallie Mae, this is a type of private loan that gives you some very competitive interest rates and makes sure that you can borrow as much money as you need.
It’s generally less expensive than a private loan in interest but not quite as good as a federal one.
Co-signing on Private Student Loan
If you choose to co-sign a loan for someone it actually means that you’re taking on the debt right alongside them.
If they default on the loan you’re actually going to be held responsible and you’ll find that your credit goes down right along with them.
That’s definitely going to be a problem if you weren’t planning on making the payments.
Private Loan Considerations
One thing to keep in mind with a private loan is that they might have variable interest rates.
If the interest goes down it can be a benefit to you.
If it goes up, however, you could end up with a much larger payment then you are able to pay and that’s going to cause you a whole lot of problems for your credit and finances.
Benefits of Private Loans
Let’s take a quick look at some of the good things about private loans.
First, you’re going to have lower interest rates than a federal loan, as long as you have the best possible credit.
These are the rates that you’ll see advertised, but those who have poor or even average credit aren’t going to be able to get these.
Instead, you’re going to see it’s hard to qualify for this rate. The only easy way to get this type of rate is to get someone to co-sign for you.
If you need to get more money than you can get through a federal loan this is a good way to get it.
In general, you’re not going to have a problem getting as much money as you need to pay for your schooling.
Where a federal loan could cap you at $5,500 to $7,500 a private loan is going to give you the money that you need to pay for your tuition, fees and any other school-related expenses that you might need.
Cover The Financing Gap
If you did get a federal loan but it just wasn’t quite enough you might want to take a closer look at private loans to help you get a bit more.
If you take out that $5,500 in loans with $3,500 in subsidized loans you’re going to want to look at private loans to help you get a little bit further ahead and to cover the remainder of the costs.
Downsides of Private Loans
On the other side, there are some things you’ll want to look at.
Since most people aren’t going to qualify for the low interest because they don’t have the right credit or don’t have a co-signer you’re likely going to pay a much higher rate for your loan than you would if you went with a federal loan.
This can actually get quite expensive overall and you may find that you’re far worse off than if you’d stuck with federal.
You’ll also need to meet some different standards to even get approved and you may not be able to do it alone.
If you run into some financial difficulties you can generally work with a federal loan to lessen the amount owed.
You may even be able to defer payments or start a different payment plan in order to make the payments.
With a private loan, however, you’re not going to have these options and you could end up with payments that you can’t afford to make.
This is especially true if you find yourself unable to get a job immediately after graduation.
With a federal plan you may be able to get graduated payments, forbearance and more.
With a traditional private lender, however, they’re going to expect you to make the payments on the schedule that was originally agreed, no matter what else might be happening in your life.
That plan may range from only 5 years to up to 30 years, but it will continue to cost you the same amount at all times, without the possibility of getting help.
Forgiveness Isn’t an Option
When it comes to federal plans there are certain circumstances where you could actually be eligible for loan forgiveness.
That means you would be able to waive a portion of the fees and loan amount that you borrowed, which can help you financially.
This is great for those who qualify.
It also qualifies for those who just don’t have enough money and could allow you to waive the remainder of your debt if you make set payments for a certain period of time.
Then, after that period has passed the rest of the debt is waived. This isn’t possible with a private loan, however.
Instead, you’ll be required to continue paying on the debt until you’re able to completely pay it off.
This could actually take several years or even several years more than the original agreement was for, depending on the situation that you find yourself financially.