I'm a first year and I'm searching for student loans with my mom
and I'm not sure which one is the best one I should take out. Do you
have any suggestions?
— Joanna P.
When comparing student loans, consider both the cost of the loan and
the other benefits of the loan program. The cost of a loan is based on
the interest rate, fees, subsidized interest benefits and discounts.
The other benefits may include deferment and forbearance options,
alternate repayment plans and loan forgiveness options.
Students should always borrow federal first, regardless of whether
they are undergraduate or graduate students. Federal student loans are
cheaper, more available and have better repayment terms than private
Private student loans, on the other hand, offer variable interest
rates, which have nowhere to go but up.
Some private student loans now offer
These fixed interest rates are competitive with federal education
loans only for borrowers with excellent credit. Getting the lowest
interest rates may require in-school
payment of the interest as it accrues and may require a creditworthy
Federal education loans do not require cosigners, unlike private
student loans, with more than 90% of new private student loans
requiring a creditworthy cosigner. A cosigner is a coborrower, equally
obligated to repay the debt.
Most private student loans do not have up-front pricing. The only way
to tell what the lender will charge you is to apply for the loan. Very
few borrowers qualify for a private student loan's best advertised
price. In fact, many more borrowers will get the highest interest
rate. Some state loan programs offer lower interest rates than
commercial lenders, but this isn't always the case. There is no way to
tell which lender will offer you the best interest rate without
applying and comparison shopping. There are a variety of
loan comparison sites
, with some providing a comparison of the
actual interest rates you will receive.
Private student loans may also lack some of the other benefits of
federal education loans. Federal student loans provide more options
for financial relief than private student loans. For example, federal
student loans offer income-based repayment, which bases the monthly
loan payment on a percentage of the borrower's discretionary income,
not the amount you owe. Federal student loans offer public service
loan forgiveness, which will forgive any remaining debt after ten
years of full-time employment in a public service job while repaying
the loans in the Direct Loan program. (The federal Parent PLUS loan
does not offer income-based repayment or public service loan
forgiveness.) Federal education loans offer the economic hardship
deferment for up to three years and forbearances for up to five years,
while private student loans usually offer forbearances for at most one
year and may charge a fee for each forbearance. Federal education loans also
offer extended repayment and graduated repayment.
Loan limits for the federal Stafford loan are lower than the loan
limits on federal PLUS loans or private student loans. Dependent
undergraduate students can borrow up to $5,500 as a freshman, $6,500
as a sophomore, $7,500 as a junior and $7,500 as a senior. That's a
total of $27,000 for four years; the aggregate limit is $31,000.
Independent undergraduate students can borrow up to $9,500 as a
freshman, $10,500 as a sophomore, $12,500 as a junior and $12,500 as a
senior. That's a total of $45,000 for four years; the aggregate limit
is $57,500. Dependent undergraduate students whose parents were
denied a Parent PLUS loan may qualify for the independent student
limits. Graduate students may borrow up to $20,500 per year ($40,500
for students in medical school) with an aggregate limit of $138,500
including undergraduate loans ($224,000 for students in medical
school). The annual limit on the federal PLUS loan is up to the full
cost of attendance minus other aid received, and there are no
Since the federal Stafford and Perkins loans have lower interest
rates, the optimal strategy is to exhaust eligibility from the federal
Stafford and Perkins loan programs before resorting to other types of
As a general rule, students who have no choice but to borrow from
private student loan programs or the federal PLUS loan program may be
overborrowing. Total federal and private student loan debt at
graduation should be less than the annual expected starting salary,
and ideally a lot less. If total student loan debt is less than the
annual income, the borrower will be able to repay the loans in about
10 years. Otherwise the borrower will struggle to repay the loans and
may need to rely on alternate repayment plans, such as income-based
repayment and extended repayment, in order to afford the monthly loan
payments. But this may mean that the borrower will still be repaying
her own student loans when her children enroll in college.