There are many options to consider when taking out a student loan, so it's no surprise that deciding which one to choose can be overwhelming. On one hand, federal government loans offer many benefits for students, but private loans can allow more flexibility and choices for the borrower. Not sure where you fit in? Here are some guidelines:
Although most financial aid experts agree that you should max out your federal loans before using private loans, almost half of all college students borrowed less than they could have on their federal loans. Filling out the FAFSA is the first step in the process of finding out exactly what amount you are eligible to receive toward your tuition. This online form determines what you can count on through other resources like scholarships and grants, then helps you figure out what you need to meet the rest of the cost (you can learn more about filling out the FAFSA here). Federal loans come with mandatory protections for the borrower – including benefits like deferment, the ability to postpone making payments until several months after graduation or in the case of personal economic hardship. So which situations are best for taking out a federal loan?
You need up to $5,500 dollars
Federal loans come with maximum limits attached. According to the U.S. government's student aid website, the maximum amount that a first-year student can borrow in direct loans is limited to $5,500 (or $9,500 if they're not a dependent, or if their parents cannot get Parents PLUS loans), which may not cover the full cost of your education. For example, if you attend a school that costs $30,000 a year and you receive a financial aid package worth $10,000, you will still need to make up the extra $20,000. A federal student loan would only cover about $5,500 of that amount, leaving you on your own for the remainder.
You plan to pursue a career in public service after graduation
Currently, students who are planning to become teachers, work at nonprofits, or seek other public-sector work should strongly consider turning to federal loans as their main option when it comes to borrowing money for school. By completing the appropriate paperwork each year of your public-service role, you may qualify to have your loan forgiven after a decade of service.
Keep in mind that if you expect to pay off your loans in 10 years anyway, this option may not be as attractive. Additionally, any loans forgiven after that 10-year period will count as income, so you may receive a higher tax bill in your 11th year on the job.
You think you may qualify for income-driven repayment after graduation
Studying something you are passionate about is a priority, but it's important to be realistic about your future as you do it. Many fields have a steep curve after graduation where it could take workers years to reach a comfortable income. If you know you're going into one of these fields, federal loans are a great option. Unlike private loans, which have a set minimum payment that must be made monthly, federal loans can adjust that minimum through one of several income-driven repayment programs. Not only do these options keep your payments low and proportionate to the income you're making, but you may also be eligible to have your remaining debt forgiven after a certain amount of time (usually 20 years).
Constantly rising tuition means that federal loans don't go as far as they once did, leaving private lenders to help bridge the gap. In many instances, the private loans that they offer make the difference between students' ability and inability to pay the expenses associated with college.
Of course, private loans come with their own set of guidelines. These are the situations where taking out a private loan can be the right choice for you:
Your federal undergrad loan limits are maxed out
The maximum total amount that a dependent undergraduate student or their parent can borrow in direct federal loans in an undergraduate career is $31,000 (independent borrowers can take out $57,000). An alternative to using higher-interest PLUS loans to pay tuition, private student loans can help you cover the remaining cost. Many lenders offer competitive rates on student loans, and small credit unions or fintech companies like CommonBond can be great solutions when it comes to finding an option that works for you.
You're going to grad school
Graduate school is increasingly becoming a prerequisite in many industries. However, the cost of graduate school can be a deterrent, especially when coupled with already existing undergraduate loans. With the cost of a master's degree alone typically running between $30,000 and $120,000, federal loans can be a big barrier to attendance (the maximum loan limit per year is $20,500). Additionally, private lenders often offer interest rates that are lower than federal Grad PLUS loans, providing an attractive choice to those looking to fund their graduate school education.
You can get a cosigner
Many private loans, especially those that subsidize an undergraduate degree, require a cosigner. This can be a good opportunity to get a better interest rate. Since private lenders can be more flexible with the amount of interest they charge for a loan (federal loans are at a fixed rate for all borrowers), having a cosigner with a great credit score can open up doors and save money in interest payments over the life of the loan.
With so many student loan options available, it's worth researching to find out what fits best – federal loans, private loans, or a mix of both – before you commit to a specific lender. This preparation could be the key to paying off your debt after graduation.