Now it is time to think about taking out a student loan, but which type of loan do you choose? You will have the option of a federal student loan or private loan. There are different reasons to choose each type of loan and each one offers a different set of pros and cons. Below, we will cover these pluses and minuses to help you make the right decision.
Pros of Federal Student Loans
When it comes to federal student loans, there are many different pros and benefits that are extended to you as a borrower. For starters, the interest rate is fixed, which means it will not fluctuate throughout the life of the loan and you will always know what interest rate you are paying.
The next benefit is that you are extended a variety of flexible payment plan options. If you have trouble affording your student loan payments, you will find that you can have your loan payments deferred, which puts the payments on hold for up to a year. You can also apply for income-based repayment plans, which base the amount of your loan payment on your income.
If something tragic happens to you and you are either killed or you become disabled, your student loans are cancelled out and forgiven.
Lastly, federal student loans do not base whether or not you can borrow on your creditworthiness. You do not have to have a credit check performed and you will not be denied, even if you do have bad credit.
Pros of Private Student Loans
There are some pros to private student loans and the first pro is that you will likely receive a lower interest rate on your loans. In fact, if you choose the variable rate option, your loan rate could be as low as two percent. You do need to make sure that you understand this rate can go up at any time though.
Another plus is that private student loans will cover the cost of your attendance and pay for your education. You may not receive any additional funds and you may not be able to purchase everything you want with your loan, but you won’t have to worry about tuition or books.
Lastly, private student loans can be customized to meet your needs. Therefore, if you only need a $500 loan, you can apply for that specific amount.
Cons of Federal Student Loans
There are some cons to federal student loans, which should be addressed. The first con is that if you do not pay your student loans, you can end up in some serious debt. In fact, the government will not allow you to just not pay your loans and they can garnish your wages, ruin your credit score, and demand payment by placing liens on the things you own and your tax returns.
Another downside is that you cannot consolidate both private and federal loans together, so if you take out both, you will be responsible for two individual loans.
Cons of Private Student Loans
There are some cons to private student loans that we will cover as well and you should pay attention to them, as they are noteworthy.
The first con is that it is difficult to qualify for a student loan. In fact, most students will not qualify to receive one unless they have a co-signer, which can be hard to get. You do need to have a good credit score, a good credit history, and a job. Oh and maybe some references.
The next downside to a private student loan is that you must start making payments while you are still in school. This can place an unnecessary burden on you, especially if you did not plan on working while in school.
Lastly, you do not have as many protections as you do with a federal student loan. In fact, you will find that your repayment options are nearly non-existent. Even if you lose your job, you are responsible for the monthly amount.
Final Thoughts on Student Loan Choices
Federal student loans are the best option for students because they do offer protection and they have your best interests in mind. While a private student loan is not a bad idea, you just may not be ready for one right away.