Choosing the Right Student Loans: Federal vs. Private
In no uncertain terms, our advice is: always get federal student loans first and find private student loans to fill any remaining gaps if federal alternatives are not enough to cover the cost of your education.
Federal Student Loans
- Carry fixed interest rates and usually have a lower total cost than private loans with variable rates.
- Usually have more flexible terms and deferment plans.
- Might be subsidized if you demonstrate substantial need, making them even cheaper.
- Some are eligible for things like Income-Contingent and Income-Based repayment, and loan forgiveness for students who pursue careers in certain fields, or public service.
Federal loans do have limits on borrowing, so it may not cover the entire cost of your education.
To apply for federal aid, you must complete the FAFSA, or Free Application for Federal Student Aid at fafsa.ed.gov.
Private Student Loans
- Are an alternative funding source that could help fill the gap between the money you have for college and the money you owe.
- Rates and borrowing terms change from lender to lender, and change based on your credit, so comparing your options with SimpleTuition could save you thousands.
- Require a more substantial credit check then federal alternatives—for most college students, that means you’ll need a cosigner.
- Interest rates are usually variable, meaning they change over time.
Choosing the right student loan can be challenging. But it doesn’t have to be impossible. Here’s the process:
Start by filling out the FAFSA, or the Free Application for Federal Student Aid
Without it, you won’t have access to federal student loans, many of which are not based on need. Don’t ever assume you won’t qualify for federal aid.
Private Student Loans
Comparing private student loans is the best way to find the right student loan for you. You should compare across variables that matter, such as: APR, Total Cost, Monthly Payments, etc. SimpleTuition’s student loan comparison tool can help. The best part? It’s free.
Dig deep for alternatives to private loans
It will save you money in the long run to use private loans as the last source of funding. Remember to take into account your savings, any bonds that may be collecting dust in a safe somewhere, local and national scholarships, government loans, part-time work, or work-study as ways to cover the cost of college.
Know your loan options
It’s important to investigate many different private loans before you apply in order to make sure you are getting the ideal arrangement for your needs. We appreciate that this can be a time consuming process, so we have included information on dozens of different lenders on SimpleTuition.com. We can even compare your options for you, saving you time and money. And, as always, it’s free.
Look beyond the annual percentage rate (APR)
It is important, of course, but there are many other factors to consider, such as the total cost of the loan, deferment options, and monthly payment. All of these criteria are available in the listings at SimpleTuition, making it even easier to compare.
Confirm the interest rate for which you qualify
It’s important to confirm interest rates with the lender you are researching. The actual interest rate and fee on your loan will be determined by the credit profile of the borrower and cosigner. Make sure to consider the rate offered to you before you commit.
Find a credit-worthy cosigner
Most college students will need a cosigner. Increasingly, this goes for graduate students, too, since you may not have enough of a credit history to qualify for a loan on your own. An important thing to note: the better your cosigner’s credit, the cheaper your loan.
Ask if the lender uses a “servicer”
A servicer is a separate company that handles the details of processing and collecting loan payments, customer service questions from borrowers, originating the loan, and more. Borrowers are often confused when they think they are taking out a loan from Company X, but then get paperwork from Company Y. Borrowers should communicate with the servicer and not the lender with questions, address changes or any changes to the student’s status.
Find out if the lender will capitalize the interest on the student loan
Some lenders will take the interest that is accrued when a student is in school and not making payments and add it to the principal, or the original borrowed amount. This usually only applies to unsubsidized federal student loans and private student loans.
Capitalization increases the amount owed and the amount of each monthly payment
Capitalization increases the amount owed and the amount of each monthly payment. Some lenders capitalize the interest every three or six months, or once a year. The least expensive option is to find a lender who will capitalize the interest only once.
Learn about repayment assistance options
Look for a lender that will help manage your money with a variety of options for payment plans and repayment assistance. Graduated repayment is one option that means your monthly payments start out lower and increase as you earn more money. Forbearance is a deferment of your loan payments if you cannot make them, due to extenuating circumstances. The point here: know what your options are.
Choose a lender with good customer service
Remember that you are the customer. In most cases, you have plenty of options from which to choose for a lender and student loans are a big commitment. Make sure to find a lender who you can reach with a toll-free telephone number or fast online assistance available 24/7.
An Important Reminder: Always exhaust your federal student loan options first, before you pursue private student loans. But if you do need a private student loan, we highly recommends that you secure a credit-worthy co-signer. It can save you literally thousands of dollars.