What You Need To Know Before Shopping For Student Loans.
Article By : Patrick Mansfield | U.S. Consumer Finance
Your Options When Shopping For The Right Student Loan:
If you plan to take out student loans, you are generally limited to two options: federal and private loans. Federal loans are offered by the government and have many benefits, including fixed rates, interest subsidies and loan forgiveness. On the contrary, private loans are usually offered by banks and can carry rates up to the double-digits. Usually, federal loans tend to be the more attractive option, as the comparison below shows. However, there is a cap the monetary value of federal loans that can be taken, which is why some people have to opt for a using a combination of the two.
Federal loans are generally cheaper and easier to repay. Borrowers are advised to obtain these loans to the maximum extent possible before seeking private loans. They are partially subsidized and have relatively flexible repayment options; most students are eligible. One big drawback is that the amount of money you can borrow is limited. Additionally, failure to make payments can result in garnishment of wages and tax refunds.
As opposed to federal loans, private loans are almost always more expensive and offer less flexibility of repayment. The one main benefit is that you can borrow larger amounts. Additionally, if you have very good credit, you may even be able to obtain interest rates than are lower than those on federal loans.
On the other hand, interest rates tend to be variable and subject to change without notice. Alternative options for repayment can be few and far in between.
Now that you have a basic understanding of the differences between the two types of loans, please read the following summary, which offers further details regarding the two types of loans.
Both loans usually offer a six-month grace period after graduation before loans must be repaid. However, if you run into trouble making payments, this is where there are major differences. Federal loans can provide flexibility and assistance if you have trouble making payments. In some cases, the debt can even be forgiven for military and various public types of work. However, private loans are relatively inflexible for those with financial hardships.
The rates of federal loans are fixed, and currently can be up to 6.41 percent, depending on the program. The Perkins and Subsidized Direct Loans carry no interest while you are in school. There is also a four percent and one percent loan fee on PLUS and Direct Loans, respectively.
For private loans, the rate is variable and can change at any time. You rate is partially determined by factors such as your credit score and unlike with federal loans, interest is accrued while you are in school. Other fees can also apply, depending on the bank.
Nearly everyone is eligible for federal loans and those with lower incomes will usually qualify for lower rates. On the other hand, eligibility for private loans is determined by the lender, in part based on your credit score; you may also need a co-signer.
The limits on federal loans vary, but as a rule of thumb cannot exceed your actual college costs. Currently, undergraduates are limited to $12,000 per year and graduate students are limited to $20,500 per year. For private loans, there are no fixed limits; the limits are in part determined by your lender and are based on a variety of factors. However, it is highly advised that you do not borrow more than your actual costs.