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Student Loans: Private vs. Government

Private Student Loan

Financing college is a tremendously expensive proposition. So where do you go for a loan? Are there advantages to taking loans for college from the government or is it better to go for private loans? This review will look at the alternatives in terms of pros and cons and allow you to make a better decision when it comes to financing your students or your own college education.

Government loans

There are several different types of student loans available through the government. Quite a few changes have occurred with government student loans so make sure you read loan eligibility carefully. These include Federal Perkins Loans, William D. Ford Direct Stafford Loans, Direct unsubsidized Stafford Loans, and Direct Plus Loans. Both Federal Perkins Loans and William D. Stafford loans are available to both undergraduate and graduate students attending at least part time with demonstrated financial need. Perkins loans range up to $5,500 for undergraduates and $8,500 for graduate students. Direct unsubsidized Stafford loans are not based on financial need and can range up to $20,500. Direct Plus Loans are available to parents of enrolled students and graduate students with a good credit history. These loans do not have maximum allowances. You can check out full information here.

Pros/Cons of government student loans

The advantages of government loans include low interest rates and easy repayment schedules. For any Parent PLUS loan originated on or after July 1, 2008, parents can defer payment on the loan until after the student graduates though interest will continue to accrue. One can also apply for a economic hardship deferment or forbearance on a PLUS loan. Fees and interest rates are generally much higher with private loans but the monthly payments can be lower. It is also important to note that interest does not accrue on Perkins or Stafford loans while the student is in college. If you agree to an automatic withdrawal from your checking account on PLUS loans the interest rate may be lower than the stated rate. With government loans you can also consolidate your loans and negotiate alternate payment arrangements. About 70% of the people who apply for a PLUS loan will qualify. Even if your credit history is not good apply for a PLUS loan anyway because if you are turned down your student may qualify for a larger Stafford loan.

Private Loans/Home Equity Loans

There are a variety of options when taking a bank loan, private loan or home equity line of credit to pay for college. To qualify for a private loan you generally must have a good credit score.

Pros/Cons private college loans

One of the advantages of taking a home equity loan or line of credit is that they are tax deductible including the interest on up to $100,000 if itemized on schedule A. Student loans are also deductible if not itemized. If you as a parent do not want to take a loan such as a PLUS loan for your child's education then alternative loan taken by the student might be better for you. Note that many private student loans require a cosigner. Some private lenders will also allow the parent the option to defer payment while their son or daughter is in school. Private lenders in general do not offer the option to defer the loan payments due to economic hardship or job loss. A downside of private student loans and home equity lines of credit is that the loans may have variable interest rates as opposed to the fixed government loans. If your credit score is great then you may qualify for low interest rates on a private student loan but these are generally only available to those with great credit backgrounds. You always want to be sure you read the fine print on any private loan as the advertised rate could be just a teaser rate while the rates could change over the life of a typical 20-25 year school loan. Also it is important to note that most private college loans are only available to those with credit scores of 650 and above. While a default on a federal education loan can result in garnishment of wages, social security payments and income tax refunds, if you default on a home equity loan you lose your house.

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