Federal vs Private Loans

If you have a student who is off to college this fall, you are probably being inundated with offers for private student loans. As a general rule, I recommend federal loans over private, primarily because the federal loans offer so many protections like forbearance and income-based repayment. However, your circumstances may lead you to different priorities.

If you are considering private loans, make sure you are making apples-to-apples comparisons. The important considerations are:

• Interest rate

• Loan fees

• Borrower protections

Just looking at the monthly payment can be misleading, because the payment term is typically the biggest driver of monthly payment. Federal loan payments are typically quoted on a 10-year repayment term, whereas private loans often quote 15-year terms.

There are also a number of financial institutions that refinance student loans. Those that only work with college graduates, such as SoFi and DRB, tend to offer the best rates. You might be best served in the long run by taking out federal loans during the college years and then, once your graduate finds stable employment, looking at private refinancing options. Most of these institutions will also refinance parent PLUS loans into student loans, i.e. pay off the parents’ loan with a new loan made to the student.

Of course, the first step is to limit the amount you borrow in the first place by making a good choice about a school you can afford.