Pros and Cons of Federal and Private Student Loans

StudentLoan Deciding where to go to college or graduate school is a big decision, but deciding how to pay for it can be equally daunting. There are many different loan options to choose from when financing school for yourself or someone in your family that it can be hard to tell which is best. The following information will help you decide if a private or federal student loan is the right choice.

A federal loan is set up by the government to help students and their parents face the ever-increasing cost of an education. The United States Department of Education (DoED) offers federal loans through two programs: The William D. Ford Federal Direct Loan Program (Direct Loan) and the Federal Perkins Loan Program.

The Direct Loan Program is the largest federal loan program and includes four types of loans: The Direct Subsidized Loan, the Direct Unsubsidized Loan, the Direct PLUS Loan and the Direct Consolidation Loan. The Department of Education itself is the lender for each of these four loans.

The biggest advantage of a Direct Subsidized Loan is the fact that no interest is charged while the student is in school on at least a half-time basis or during a deferment period. Students must demonstrate financial need in order to receive a Direct Subsidized Loan, however. Another disadvantage to this type of loan is the fact that there is currently an annual cap between $3,500 and $5,500 depending on the student’s grade level, which is generally not enough to cover annual tuition.

The Direct Unsubsidized Loan has the advantage of being available to students who don’t demonstrate financial need. This benefit is balanced by the fact that the student is charged interest, even while in school. There is also a current annual cap of between $5,500 and $20,500.

The advantage of a Direct PLUS Loan is that it can help a student cover educational expenses that are not met by other federal loans. Caps on Direct Unsubsidized and Direct Subsidized Loans can leave portions of tuition unaccounted for, and a Direct PLUS loan is intended to fill that gap. The negatives of this type of loan are that good credit history must be demonstrated to obtain one and interest is charged even while the student is attending school. Interest on a Direct PLUS Loan is typically higher than the other types of Direct Loans.

The second type of federal loan program, the Federal Perkins Loan Program, helps students with exceptional financial need. The school itself is the lender with the Perkins Loan Program.

One of the benefits of a Perkins Loan is its low interest rate of five percent. Some of the downsides of a Perkins Loan is the fact that the amount offered depends on the availability of funds at the school, since the school itself is the lender. Another downside is the fact that there is a cap on how much can be lent annually, which is currently $5,000 for undergraduate students and $8,000 for graduate and professional students.

“Federal student loans offer borrowers many benefits not typically found in private loans,” according to the office of Federal Student Aid at “These include low fixed interest rates, income-based repayment plans, cancellations for certain employment and deferment (postponement) options, including deferment of loan payments when a student returns to school.”

A private student loan is an alternative to federal loans. Borrowers who aren’t able to cover the cost of education with a Perkins Loan, Direct Subsidized or Direct Unsubsidized Loan and who demonstrate good creditworthiness might be able to obtain a better interest rate with a private loan to cover the remainder of the expenses than with a Direct PLUS Loan.

To obtain a better interest rate than a Direct PLUS Loan, however, it may be necessary for the parent of the student to co-sign. Another downside is the fact that the interest rate can fluctuate, and the borrower won’t be able to take advantage of federal programs that forgive or defer repayment.

If you have questions about student loans, please give one of our financial experts a call.

Used with Permission. Published by IMN Bank Adviser
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