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Private Loans vs. Federal Loans. What are the pros and cons?

From what I can understand there are many types of loans for undergraduate or graduate school. Can anyone explain why I should choose a federal loan over a private loan or vice versa? #college #finance #financial-services #student-loans #federal-government #fafsa

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Ron’s Answer

With private loans, the interest on the loan begins accruing as soon as the loan documents are signed by you. With the federally backed loans there may be many that you may qualify for. Let's look at a few. An unsubsidized loans work the same way as a private loan when it comes to the interest accruing at document signing time. A subsidized loan is different. The interest will not begin to occur until 6 months after you graduate or 6 months after you stop going to school. If you are going to borrow money, this ultimately, may be the least expensive. Also, another program that is much different are Pell Grants. These are grants applied for when applying for student loans and are granted based on your income or lack of income. These do not have to be paid back. I am assuming that you have a FAFSA account of which the grant, unsubsidized loan and the subsidized loan can be applied for and then they will come back with what you qualify for and then you can choose what you want to accept. I hope this helps. Good luck in your pursuits.

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Ann’s Answer

Hi Hashir,

This is a great question! I have been counseling students about financial aid for years, so you are in good hands. There are several pros and cons to both types, so first I will explain how they are similar and then I will talk about what's different about each if them.

Federal Stafford Loans and Private Loans are both designed to help students fund school and can be used to assist with undergraduate and graduate degrees when a student is enrolled above part time. In other words, you must take at a certain amount of credits each semester to be eligible for them. Both types will pay in directly to the school on a term basis, (ie semester or quarter). If you borrow beyond the cost of your tuition, the leftover funds will be sent to you in a stipend. (I recommend only borrowing what you need, because student loans are expensive to pay back). You must remain enrolled above part time and meet certain academic requirements to earn the amount of the loan. In other words, your eligibility will be eliminated if you drop courses and go below part time, or you repeatedly fail the same course. The federal government also offers private loans such as Parent Plus or Grad Plus loans. They also will be deferred (you don't have to make payments) as long as you are in school above part time. Six months after you go below part time, or stop going to school you will have to make payments. If leave school and then return that clock picks up where you left off. For example, let's say you go full time the whole time for a Bachelor's degree and then take a semester off. Your 6 month grace period starts at that point. When you return the loans will go back into deferment. Once you graduate, the grace period you have will not be 6 months. It will pick up where you left off.

Here is where they are different.

Federal student loans can be both subsidized (you aren't accruing interest while in school), or unsubsidized. The amount of subsidized loans you are eligible for is based on financial need. There is an aggregate loan limit, in which you are only eligible for a maximum amount of loans in your lifetime. I believe that is $57,800 as an undergraduate student and $120,000 for a graduate degree. There is a fixed interest rate of 6.8%. (These numbers could change at anytime). You are limited to federal student loan lenders and can only consolidate your federal loans once. Consolidating your loans means clumping them into one large loan to get one payment. Also, if you don't make payments the government can take payments out of your paycheck, or even take your tax refund. You also cannot include them in a bankruptcy.

On the pros of federal loans, if you can't afford your payments there are a number of options to help reduce or pause your payments. One income based repayment plan will allow you to have your loans absolved after 25years of making on time payments. Which means the government will not require you to pay the total balance off. Also, in some cases, if you work for a nonprofit for 10 years you can have your loans absolved. The debt also can't be transferred to someone else. The amount you're eligible for also increases as you continue your degree. For a freshman you can receive $9,500. As a sophomore the amount is $10,500 and junior and seniors can receive $12,500. These numbers can also change.

For private loans, your eligibility is based on a credit check. If you have poor credit or don't have a credit history, then you will need a cosigner (someone that will be responsible for the debt if you fail to pay). The terms of the loans will differ depending on the lender. Interest rates tend to be lower, but will vary from lender to lender. You have more options with lenders, but you will have to do your homework as to what the terms of the loans are. There is no maximum limit, and if you fail to pay, the lenders are limited to the normal legal process for collecting. There also isn't a limit on how many times you consolidate. The amount you are eligible for is also based on credit. I think that sums private loans up.

I know this a lot to digest, so feel free to let me know if you have questions. Good luck!

Ann recommends the following next steps:

Go to the website: fsa.ed.gov to get more information on federal loans.