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•  Federal loans typically have lower interest rates and more flexible repayment benefits than private loans.

•  Use federal loans unless you have a high credit score or co-signer.

•  You can get a lower rate after you graduate by refinancing your loans.

When considering student loans, the most important thing is to find the lowest interest rate you can. You have two different options:

1) Federal loans provided by the U.S. government

2) Private loans offered by companies like Sallie Mae or College Ave

As an undergraduate, your best bet is to stick with federal loans, as the current rates at 4.45% are still farily low. If you’re a graduate student who has built up a strong credit score (e.g., above 750), it may be worth comparing the rates available from both federal and private lenders.

Benefits of Federal Loans

The federal government originates more than 90% of all student loans. Federal student loans offer benefits not typically found in private loans – including low fixed interest rates, income-based repayment plans, loan forgiveness for certain types of employment, and the ability to postpone loan payments if you go to back for graduate school.

Undergrad students should use up their federal student loan options before considering a private loan.

For these reasons, students and parents should use up their federal student loan options before considering a private loan, which will require a credit check. Private lenders who offer refinancing become a more attractive option when you begin repaying your loan. Luckily for current students, interest rates have been falling, so federal loans have become an even more attractive option.

Federal interest rates have been decreasing in recent few years.

The federal government provides loans up to the cost of attendance, which includes tuition and other expenses like room and board. Although we wouldn’t recommend borrowing more than the cost of attendance, if you need more money than what is provided, you can look at private loans to cover the rest. Beware that rates on private loans can be more expensive, and you might need a co-signer (such as a parent) to back you up.

Origination Fees

Whether you get a federal or private loan, the lender will charge an origination fee up-front when you actually take out the loan. For Direct Loans, the fee is 1.069% of the loan amount; for Direct PLUS loans, it is 4.276%. That means if you take out a $10,000 Direct Loan, the 1.069% fee will be deducted from the amount you receive, and you’ll actually receive $9,893.10 in cash.

This may seem unfair, but origination fees cover the cost of staff needed to run the federal student loans program. Private loan origination fees will depend on your credit score and are typically higher than federal loan fees. Origination fees are only charged for loans you receive while in school. Once you begin repaying your loans, you won’t have to pay them again. Student loan refinance companies like SoFi and LendKey do not charge any origination fees when you switch your loans to them.

Perkins Loans

The Perkins Loan is another option provided by the federal government. This loan has a flat fee of 5% with no origination fee. Perkins Loans must be obtained through your school and are set aside for students with exceptional financial need. They are capped at $5,500 per year for undergrads and $8,000 per year for graduate students. At the current undergrad rates, you’re likely better off sticking with the Direct Loans.

Summary:

  • Federal loans typically have lower interest rates and more flexible repayment benefits than private loans.
  • Stick with federal loans unless you have a high credit score or co-signer.
  • You can always get a lower rate after you graduate by refinancing your loans.

Disclosure: Student Loans Guy is a free site that provides unbiased information on financial products. In order to keep the lights on, we are compensated when you get a product from one of our partners. Part of this goes to the Student Loans Scholarship and allows our site to always remain free to our readers.

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