Chances are that you will have to use student loans as a way to help fund college. After all, the cost of college continues to rise, and while you can get scholarships and grants, these might not completely cover expenses.
Figuring the right student loan mix between the types of federal and private student loans could be a daunting task.
LendKey's Jeff Fritz highlights that each student and family situation is different, so you have to consider your own circumstances when determining the right types of student education loans for college
What to Consider When Determining Kinds of Loans to Use for College
There are a few basic items Fritz said should be thought about when you begin taking a look at your federal vs. private student loan mix. These items can present you with a general method of your student loans.
What Will i Be eligible for a Based on the School's Award Letter?
Take phone award letter from your school. Do you qualify for Direct Subsidized loans? With a Subsidized loan, Fritz points out, the government covers your interest while you are in class. With Unsubsidized loans, interest begins accruing on your loan immediately.
However, you will find limits to how much you can borrow in Subsidized and Unsubsidized loans, so it's important to keep that mind.
Additionally, you may be eligible for a need-based financial aid or some form of scholarship, so you may not need to obtain loans beyond Subsidized and Unsubsidized federal loans.
Carefully browse the award letter to ascertain if you get Work Study and use of other individuals that may reduce your requirement for loans.
What are the Origination Fees?
“The federal home loan programs currently have origination fees,” says Fritz. “Those have to be factored into the APR when you compare federal and private loans.”
He highlights that most private lenders, including a lot of those partnering with LendKey, don't charge origination fees for their loans. This could really make a difference in repayment in the future.
Do You Have a Cosigner?
When you receive a federal loan, you don't have to worry about your credit or income situation. You do not need a cosigner, so these loans are pretty simple to get.
However, says Fritz, “Most private lenders need a cosigner for undergraduates if you don't meet credit and income criteria.” If you have a cosigner, Fritz continues, you may be able to get a great deal on a private student loan.
As a parent, your credit history may also lead to how to proceed. “Federal PLUS loans traditionally have experienced more lenient underwriting standards than private loans,” says Fritz. As a result, should there be credit problems, there can be little choice beyond embracing federal undergraduate loans, and taking advantage of parent PLUS loans for additional funding.
What's Your Chosen Profession?
“Certain professions in public places service and teaching could qualify you for loan forgiveness through the federal home loan programs if you meet certain criteria,” says Fritz.
For people who think they will work in a profession that doesn't pay well, but that qualifies them for Public Service Loan Forgiveness (PSLF) as well as other program, it's possible to use income-driven repayment before you are eligible for forgiveness. In this case, focusing on federal loans can make sense.
However, Fritz warns, the acceptance of PSLF continues to be relatively low because the first cohort became eligible in 2023. It's important to carefully weigh the chances of receiving forgiveness before you hang all of your hopes on it.
Can You are making Payments During School?
Fritz uses an example of a borrower who removes a $10,000 loan at 6% interest, with four years left until graduation, as one example of the benefits of making payments during school. This type of student would owe a total of $6,852 in interest when they deferred all payment until after graduation. However, simply by making monthly interest payments during school, that student would pay only a total of $3,322 in interest for the loan, saving $3,530.
“Making fixed or interest-only payments during school is beneficial, it doesn't matter what kind of education loan you select,” says Fritz. “Some private lenders provide their lowest rates to those who make interest-only or fixed costs while in school.”
Whose Name You Want the Loans in
Another consideration, says Fritz, is whom you desire to be ultimately responsible for the loan. If you want the loans in a student's name, it's really a good idea to have them get the undergraduate Direct loans, and then cosign on private loans.
With a parent PLUS loan, on the other hand, a parent's name is around the loan, which doesn't sit well with all of parents.
Some from the lenders partnering with LendKey offer cosigner release options, based on the number of consecutive payments made, along with the borrower's credit rating and income. If your borrower includes a history of on-time payments and a decent income, there is a chance the cosigner's name can be taken off the borrowed funds, that is a benefit that's not present having a parent PLUS loan.
Different Kinds of Student Loans Explained: Federal vs. Private Loans
When considering your mix of federal and private loans, Fritz recommends keeping a few of the advantages and disadvantages of each type of education loan in mind.
Federal Loans Offer:
- No or minimal credit check
- Repayment flexibility through income-driven repayment
- Loan forgiveness for several professions
- Fixed interest rates
- The capability to change repayment plans at any time
Private Loans Offer:
- A choice of fixed or variable interest rates
- No origination fees in many cases
- The capability to make interest-only or fixed in-school payments to reduce overall loan cost
- Repayment incentives for on-time payment
- Additional access to tools and resources for borrowers (e.g. career coaching)
When you assess your required student loan mix, keep what each kind of loan offers in your mind. Compare offers, and see featuring best match your current situation – and future expectations.
Choosing the Types of Student Loans to Borrow
“Everyone in higher education, from the authorities to colleges and universities, to personal lenders, agree that you should exhaust your federal undergraduate options first,” says Fritz.
“This means completing the FAFSA to see which kind of grant and scholarship aid you may receive together with potential work-study and federal loan options.”
According to Fritz, the Direct Subsidized loan ought to be utilized, due to its favorable in-school interest situation. However, once that is determined and also you realize you need more funding to close the gap, you need to consider private loans.
“If you and your cosigner have excellent credit, and you'll likely be inside a field that isn't likely to qualify you for certain payment plans or loan forgiveness, then private loans may well be a better option for you,” says Fritz.
“Students and their parents need to do their homework and compare options.”
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This post is sponsored by LendKey.