Managing Student Loans

Most students need to borrow to meet the ever increasing costs of college, and they have the option of obtaining either private of government student loans, or both. It is advisable to utilise government loans first in all instances, as there are advantages to them, and they are cheaper to service. By completing the FAFSA application for federal loans the student is also considered for a Pell grant if eligible, and it is necessary to submit the FAFSA form to be eligible for many other grants, either state awarded or awarded by colleges and universities directly.

When federal student loans are applied for there is no credit check involved, except in the case of the federal PLUS loan which parents can apply for. This means that students who are embarking on a college education are not excluded from federal borrowing even if they have bad credit. Those who apply for private student loans are subject to a credit check, and most students need to have a co-signer to stand guarantor for their loan as unlikely to have built up a credit history of their own.

If the student is eligible for the Stafford subsidized loan then the government will assume the interest payments on the loan until six months after graduation, and even then arrangements may be made to defer it. If the student is not eligible for the subsidized loan but obtains the unsubsidized Stafford loan then the student is responsible for the interest payments on the loan from the day of disbursement but can opt to defer these payments until six months after graduation, but interest will accrue daily.

Private student loans charge interest from the day of disbursement and in most cases there is no option to defer the interest, meaning that they must make the payments whilst in college.

Federal student loans offer a low fixed interest rate which private loans do not. Instead private loans are subject to the variable interest rate which can of course fluctuate and leave the student with higher monthly payments than anticipated.

Changes which have been made in 2010 mean that private financial institutions will no longer be able to provide federal student loans and they will be dealt with as ‘Direct Loans’ provided directly by the US Department of Education. This has enabled the government to cut out the middlemen and terminate the subsidies they were paying, resulting in a lower fixed rate on the Stafford loans.

A huge advantage of federal loans over private loans is that they are not subject to early payment penalties, thus giving the student the option of paying down part of the principal when funds allow. Quite often private loans come attached with penalties and fees which make them far more costly than they can originally appear.

Whilst both federal and private loans remain non-dischargeable, federal loans are not pursued after death, whilst private student loans will often become the responsibility of the family or estate of the deceased.

Private student loans are complicated by the necessity of a co-signer in most instances, which may not always be readily available to the student. As such a high percentage of co-signed loans go into default many guarantors end up with a blemished credit rating, or even worse end up assuming the payments. If payments are made late to a private loan the guarantor may well end up unable to release themselves as a co-signer, causing tension between family members.

It is still the case that despite scholarships, grants, and federal loans, many students are still reliant upon making up the shortfall of college costs with private loans, and they are indeed preferable to using credit cards as a means of funding. Always borrow as much as you can from federal sources first though as the overall repayment cost will be far lower than that associated with private loans.