Figuring out the right student loan mix between the types of federal and private student loans can be a daunting task.
LendKey’s Jeff Fritz points out that each student and family situation is different, so you need to consider your own circumstances when determining the right types of student loans to use for college
What to Consider When Determining Types of Loans to Use for College
There are some basic items Fritz said should be considered when you start looking at your federal vs. private student loan mix. These items can provide you with an overall approach to your student loans.
What Do I Qualify for Based on the School’s Award Letter?
Take a look at the award letter from your school. Do you qualify for Direct Subsidized loans? With a Subsidized loan, Fritz points out, the government covers your interest while you’re in school. With Unsubsidized loans, interest begins accruing on your loan immediately.
However, there are limits to how much you can borrow in Subsidized and Unsubsidized loans, so it’s important to keep that mind.
Additionally, you might qualify for need-based financial aid or some type of scholarship, so you might not need to get loans beyond Subsidized and Unsubsidized federal loans.
Carefully read the award letter to see if you get Work Study and access to other programs that might reduce your need for loans.
What are the Origination Fees?
“The federal loan programs currently have origination fees,” says Fritz. “Those need to be factored into the APR when comparing federal and private loans.”
He points out that most private lenders, including many of those partnering with LendKey, don’t charge origination fees for their loans. This can make a difference in repayment down the road.
Do You Have a Cosigner?
When you get a federal loan, you don’t have to worry about your credit or income situation. You don’t need a cosigner, so these loans are pretty easy to get.
However, says Fritz, “Most private lenders require a cosigner for undergraduates unless you meet credit and income criteria.” If you have a cosigner, Fritz continues, you might be able to get a great deal on a private student loan.
As a parent, your credit history can also play a role in how to proceed. “Federal PLUS loans traditionally have had more lenient underwriting standards than private loans,” says Fritz. As a result, if there are credit problems, there might be little choice beyond turning to federal undergraduate loans, and using parent PLUS loans for additional funding.
What’s Your Chosen Profession?
“Certain professions in public service and teaching could qualify you for loan forgiveness through the federal loan programs if you meet certain criteria,” says Fritz.
For those who think they will work in a profession that doesn’t pay well, but that qualifies them for Public Service Loan Forgiveness (PSLF) or some other program, it’s possible to use income-driven repayment until you are eligible for forgiveness. In this case, focusing on federal loans can make sense.
However, Fritz warns, the acceptance of PSLF has been relatively low since the first cohort became eligible in 2017. It’s important to carefully weigh the chances of receiving forgiveness before you hang all your hopes on it.
Can You Make Payments While in School?
Fritz uses an example of a borrower who takes out a $10,000 loan at 6% interest, with four years left until graduation, to illustrate the benefits of making payments during school. Such a student would owe a total of $6,852 in interest if they deferred all payment until after graduation. However, just by making monthly interest payments while in school, that student would only pay a total of $3,322 in interest for the loan, saving $3,530.
“Making fixed or interest-only payments while in school is beneficial, regardless of what type of student loan you choose,” says Fritz. “Some private lenders provide their lowest rates to those who make interest-only or fixed payments while in school.”
Whose Name You Want the Loans in
Another consideration, says Fritz, is who you want to be ultimately responsible for the loan. If you want the loans in a student’s name, it can be a good idea to have them get the undergraduate Direct loans, and then cosign on private loans.
With a parent PLUS loan, on the other hand, a parent’s name is on the loan, which doesn’t sit well with all parents.
Some of the lenders partnering with LendKey offer cosigner release options, based on the number of consecutive payments made, as well as the borrower’s credit score and income. If a borrower has a history of on-time payments and a decent income, there’s a chance that the cosigner’s name can be taken off the loan, which is an advantage that isn’t present with a parent PLUS loan.
Different Types of Student Loans Explained: Federal vs. Private Loans
When considering your mix of federal and private loans, Fritz recommends keeping some of the advantages and disadvantages of each type of student loan in mind.
Federal Loans Offer:
- No or minimal credit check
- Repayment flexibility through income-driven repayment
- Loan forgiveness for certain professions
- Fixed interest rates
- The ability to change repayment plans at any time
Private Loans Offer:
- A choice of fixed or variable interest rates
- No origination fees in most cases
- The ability to make interest-only or fixed in-school payments to reduce overall loan cost
- Repayment incentives for on-time payment
- Additional access to tools and resources for borrowers (e.g. career coaching)
When you assess your desired student loan mix, keep what each type of loan offers in mind. Compare offers, and determine which features best match your current situation — and future expectations.
Choosing the Types of Student Loans to Borrow
“Everyone in higher education, from the federal government to colleges and universities, to private lenders, agree that you should exhaust your federal undergraduate options first,” says Fritz.
“This means completing the FAFSA to see what type of grant and scholarship aid you may receive along with potential work-study and federal loan options.”
According to Fritz, the Direct Subsidized loan should be utilized, due to its favorable in-school interest situation. However, once that is determined and you realize you need more funding to close the gap, it’s important to consider private loans.
“If you or your cosigner have excellent credit, and you will likely be in a field that is not going to qualify you for certain payment plans or loan forgiveness, then private loans might be a better option for you,” says Fritz.
“Students and their parents need to do their homework and compare options.”
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This post is sponsored by LendKey.