4 Scenarios Private Student Loans are Better than Federal Student Loans

It is a common misconception that federal student loans are always a better choice than private student loans. While some students will benefit from federal options, all should at least consider a private option to compare the potential advantages of both. Many students will find the private student loan sources actually offer more favorable opportunities than federal loan sources. Particularly, students with a high income, seeking flexibility, requiring living expense loans or with adequate collateral may see better options through private lenders.

#1 You Have a High Income

If you or your family is in a high income bracket, you will not qualify for the vast majority of benefits offered through a public lender. For example, federal loan subsidies are perhaps the greatest benefit of using a federal loan option. Subsidies allow you to put off payments until after graduation. They also reduce the interest rate on your loan. However, these subsidies only go to the neediest students. Unsubsidized loans are not need-based, but they have few of the same benefits. Families or individual borrowers with high income and asset bases will simply not be offered the same benefits. Private lenders, on the other hand, will reward their financial stability with better loan options.

#2 You Want Flexibility

Federal loans are rarely flexible. In fact, they set very distinct rules on when financing is received, how it is distributed and what it may be used for. In the future, if you ever seek to modify your federal loan, you will have to do so through other federal sources. Ultimately, students who are not looking to lock in a loan option early on and seek more flexibility will not find it through public options. Private lenders are not responsible to tax payers. This means they can make case-by-case decisions regarding your loan and provide you with more flexible options now and in the future.

#3 You Need to Cover Living Expenses

Federal loans cannot be used for expenses not immediately related to education. This means they will typically only cover tuition and supplies. Students who need to additionally find funding for living expenses while attending school will likely have to get a job. Private loans, on the other hand, may be spent on a wider range of activities. Your private lender will approve a loan that has more wiggle-room than a public loan option. This may allow you to spend the money as you see fit so long as you are making timely payments.

#4 You Have Collateral

If you have collateral to secure a loan with, private options can be just as cheap as public interest rates. For example, home equity lines or 401K loans can be used to cover the cost of tuition. These options will have the advantage of lower financing cost plus the advantage of flexibility. You will find that lenders are happy to source a loan for you if you can assure against default with your personal collateral, even if the federal government is not willing to guaranty your loan.


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