Federal and private student loans are very different, but unless you’ve done your homework it can be difficult to recognize which loan is the better option. No matter how appealing a private loan may be (they often offer very low interest rates initially) you should think twice before you choose to borrow money from a private lender. Max out all of your federal loans first and carefully examine the private loan contract. Here’s why –
-Your Interest Rate may Rise
Private lenders often offer floor-level interest rates that aren’t matched by the federal loans issued by the Department of Education Direct Loan Program. However, almost every private student loan has a variable interest rate. Before you even graduate you’re interest rate could start rising and who knows how high it will soar. On the other hand, federal student loans have a fixed interest rate, and while it might be higher than the initial rate offered by private lenders you can be positive that it won’t increase.
-You’re Probably Going to Need a Co-signer
Approval for a federal student loan does not require a good credit score, but private loans do. So, in order to receive the best interest rate, you’ll probably need a co-signer with good credit. That’s a lot of responsibility to ask someone to take on; if, for any reason, you’re not able to make your monthly payment you’re cosigner will be on the hook.
-Less Flexible Repayment Terms
The government will work with you as you repay your student loans. For instance, if you lose your job the government is required to allow you to temporarily suspend payments on your federal loan. Private lenders do not share that responsibility. Some of them will suspend your payments if you encounter economic hardships, but many of them will not.
-One Late Payment Can Destroy Your Credit
After just one missed payment, many private lenders will place your loan in default. That means that your entire loan will suddenly be due, your credit score will be ruined, and your interest rate could be raised. The consequences depend on your contract.
In contrast, federal loans give you 9 months of missed payments before your loan will be placed in default. That’s plenty of time to catch up on your payments or seek forbearance.
-Severe Disability and even Death may have no effect on your Loan
Law does not require private lenders to dismiss student debt if you are disabled or pass away. That means the burden of your debt will probably be passed on to cosigners who will be forced to pay or face damaging consequences.