Many people can’t afford to pay for college outright. That’s why an estimated 43.5 million borrowers currently owe money on student loans.
If you’re gearing up to start college, you may be in the process of exploring your student loan options. And you may be wondering whether it makes sense to stick to federal student loans or borrow privately. Here are a few key things to know as you try to make your choice.
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1. Your payments may be due sooner with private loans
When you take out federal student loans, you generally do not have to make payments on that debt until you’ve completed your studies. On the other hand, many private lenders require you to make payments on your student loans while you’re still in school (though some do allow you to defer those payments until after you’ve graduated).
2. You might pay more interest on private loans
When you take out federal student loans, the interest rate on that debt is fixed. And it’s often, in many cases, considerably lower than the interest rate you’ll be charged by a private lender.
Meanwhile, private loans can have variable interest rates. This won’t always be the case, but you’ll need to check your loan offer. Variable interest rates can cause your monthly loan payments to rise over time.
You should also know that some federal loans are subsidized, which means you don’t accrue interest on your loans while you’re still in school. Rather, the government pays your interest for you. Private student loans are generally not subsidized, so in that case, you’ll rack up interest on your loans while you’re in school, leading to a higher balance upon graduation.
3. You might get stuck with a single repayment plan with private loans
One of the benefits of taking out federal student loans is getting the option to change your repayment plan should your default option not work for you. The standard repayment plan for federal student loans is 10 years. However, federal loan borrowers can apply for an income-driven repayment plan where your loan payments are calculated as a percentage of your discretionary income.
Often, when you sign up for private student loans, the payment plan you agree to initially is the plan you’re stuck with. This won’t always be the case, though, and it is worth noting that some private lenders will work with borrowers to adjust their monthly payments based on their income.
After all, private lenders want to get repaid. So just as a mortgage lender, for example, might agree to modify a borrower’s loan if that’s what it takes for that borrower to be able to stay current on their payments, so too might a private lender do the same with student loans.
4. You might have limited protections with private loans
Federal student loan borrowers can take advantage of protections like deferment and forbearance on their loans. These programs allow you to pause your payments for a period of time without being flagged as delinquent. Private lenders may offer these options, but they may not.
Clearly, limiting yourself to federal student loans has its benefits. But borrowing privately isn’t always a mistake. It may be that you’re able to qualify for private loans at a competitive fixed interest rate and other favorable terms. That’s why you always need to read the fine print when signing a loan document — whether you borrow privately or decide that federal student loans are a better choice.
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