Loans for School: Choosing Between Federal and Private

The options you elect on your loans for school will ultimately determine the expense and flexibility of your financing. Many borrowers make the mistake of thinking federal loans are always the best option. Federal loans do have many advantages over private loans, but there is not always one best option across the board. Private loans present other unique advantages for some borrowers to take advantage of in order to reduce the burden of their school loan debt.

Subsidized Federal Loans for Needy Students

If you have a significant financial need, federal loan options tend to be the best fit. For example, you may not be receiving assistance from your family, or your family may lack the ability to pay for your schooling. In this case, you can apply for a subsidized loan. The US Department of Education will "subsidize" your interest rate while you attend school. You do not have to make any loan payments during this period of time, but interest will not accrue on your loan. You need to be credit worthy to gain approval for this loan option, but your low income or lack of income will not hurt your application. 

Unsubsidized Federal Loans for All Students

Any student can apply for an unsubsidized federal loan. These loans still offer several advantages, including fixed rates, no prepayment fees and no penalties for consolidation. You may even find flexibility with grace periods on these loans. However, on the whole, these loans offer little competitive advantage over a low, fixed rate private loan. In fact, the limits on the federal loan may be too low to completely cover the cost of your education. The loans also do not permit for any living expense funding, and all financing goes straight to the university for tuition.

Bad Credit Loan Options

If you have bad credit, count yourself out of the running for a federal loan option. This is particularly true if you owe money to the IRS or have defaulted on a previous federal loan. Even low income loan options will not be available to borrowers who are not creditworthy based on these other measures. In this case, you will need to seek private loans. The best options will be available if you have collateral to use on the loan to compensate for your low credit score. Home owners or parents who own homes can use a home equity loan to help pay for college.

Flexible Private Loan Options

If you have a high income and great credit, then a private loan option may be preferable to a federal loan option, regardless of which you qualify for. You will not meet the requirements for a subsidized federal loan. Since you are an attractive borrower, the rates on your private loan may be as competitive as the rates on your federal loan. The limits will not be subject to federal regulation, though, meaning you can get a much bigger sum. Finally, you can use some private loans to pay for expenses like room and board, dining or books.

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