Federal vs Private Student Loans: Which Has Lower Interest Rates and Better Repayment Options?
Federal loans offer flexible repayment options, while private loans often have higher limits but increased risks.
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College costs continue to rise in all aspects, which often leads to increased dropout and enrollment rates. Luckily, there are student loans that you can borrow from to finance your education. While it's not entirely free money, you can pay them later after earning your college degree.
Currently, there are two types of student loans: federal and private. Both have different benefits and requirements to qualify, marking which is easier depends on what's available to your condition at the time of your decision-making.
For all graduate students, repayment can be a burden, But the payback in the long run is much more than the loan taken. So here are the two types of student loans, what you can choose, and how they work for you.
Federal Student Loans
As stated by the name itself, federal student loans came from the US government itself—the first choice among most students. This type of student loan offers lower interest rates and easier repayment options compared to private ones. You can read more from this student aid guide for an in-depth understanding.
Under this type of student loan, graduate students and undergraduate students also have the chance to draw PLUS Loans, which have numerous benefits including income-driven repayment plans and loan forgiveness programs. Also known as the safer option for most borrowers.
Private Student Loans
According to Sallie Mae, private student loans are issued by private institutions dealing with finances, including credit unions, banks, or other lenders. Because they're private and generate money from clients or customers, their terms are different from federal loans. This type of student loan rely on your credit score or that of a co-signer.
Compared to federal loans, these offer higher borrowing limits and can be used for living expenses. However, they usually have higher interest rates and more limited repayment options, which also makes them a riskier option in itself.
Both federal and private loans require repayments after one graduates, with federal loans generally offering a grace period of six months.
Students are placed into debt primarily due to the reasons that for unsubsidized and private loans interest accrues in school, leading to increased repaid amounts.
Which is the Best Student Loan to Choose?
There is currently no right or wrong direction concerning student loans; they are so long as they fit your needs and align with your future plans. A debt is a debt, after all. However, it would be recommended first to exhaust the federal loan option before securing one from a private lender, just in case they have lower costs in the long run.
You can apply through the Free Application for Federal Student Aid (FAFSA) to maximize your eligibility.
Note that private loans are only considered as a last resort when more money is needed as it is a high-risk decision where it will affect your credit score. Therefore, make sure you compare and research in order to find the best interest rates you can afford and the repayment terms.
