Private Loans vs. Federal Loan Benefits: What’s Best for Student Debt

Looking through news and blogs related to student loan repayments can be tiring. So trust me, I see the situational irony in adding another piece to the myriad of posts for us to read through. Our aim is a worthy one, however: trying to shed useful light on the big problem of a nation with lots of student debt.

That being said, while reading and thinking and looking for new information on loans can be tiring, truly useful information emerges in these news stories and blog posts. Let’s look at three such stories and updates:

  1. Private lenders are on the move to do more for grad school students.
  2. The availability of private loans will still be up against federal loan offers. Each type of loan, of course, has its pros and cons.
  3. Federal loans are getting a leg up as tips on the best ways to use federal benefits become more public.

Potential Increase of Private Loans for Grad Programs

A couple months ago I wrote a post discussing the part of the PROSPER Act that proposed a federal loan cap for graduate students. While this cap is not a certainty—since PROSPER as it stands is not a certainty—the mere prospect of such a cap has inspired private loan providers. As Andrew Kreighbaum recently explained in an Inside Higher Ed article, there are various reasons private lenders often favor graduate loans. One reason is, yes, that there is a possibility of PROSPER leaving some grad students short on needed loans. Another reason is that grad students have a high volume of amount per loan. This means that, while there are fewer grad borrowers, those borrowers borrow more money than undergraduate students take per loan.

Private? Lower Interest Rates. Federal? Big-Deal Benefits

So more private lenders are preparing to kick into a higher gear. How should borrowers respond? Which to favor? Firstly, let’s take a moment to remember every one of us will have different primary concerns when considering student loans. What is best for one person might not be right for another for financing their university education. However, there are a few general pros and cons that will factor in as important for everyone. Private loans, being privately owned and all, can provide lower interest rates than is legal for federal loans. On the other hand, federal loans have specified standards they must meet through offering useful programs. Namely, an income-driven repayment program and possible loan forgiveness.

Right away we see how which route a borrower takes depends greatly on the amount of the loan and the plan to pay it back. Will the borrower want to pay it back as quickly as possible, for example, or as gradually as possible? In the early 2000s, we saw a rise in private lenders finding sneaky ways to get to loan-seeking students before the students saw federal loan options or even other private loan providers. In 2008, however, new laws were made to minimize this malpractice. Now loan seekers can make their decisions with slightly more transparent information (not perfect, but better).

The largest motivation for taking a private loans is often the lower interest rates. The largest motivation for taking a federal loan, on the other hand, is often the clear and promised benefits. With federal loans, income-driven repayment programs are spoken of and even encouraged. Then there is this potential for debt forgiveness—which sounds great, magical even, but before we consider it a reason to choose federal over private loans, shouldn’t we look for some proof?

Are Federal Loan Benefits Reliable?

The New York Times has recently published a few articles on student debt—about veterans, teachers, and, just a couple days ago, a piece about student debt forgiveness. The article told the story of the arduous work a man recently underwent to meet the difficult loan forgiveness requirements. Although the article stresses how convoluted the process was, it ends by more or less saying: But hey, it worked. And perhaps, if we keep telling our stories and encouraging one another, it will work more often, for more people.

Such convoluted fine print and difficult rules were likely intentional ploys to minimize how many loan holders achieve this benefit. However, the requirements for debt forgiveness are sensible, when you get to the bones of them. If through word of mouth we make these rules clearer yet the rules remain firm, the government will not need to fear an inordinate amount of debt disappearing. This to say: Let’s keep sharing our debt experiences. This to say: Let’s keep reading about each other’s experiences. The private loan sector certainly has a place in funding education, but it is not currently held to the same standards as federal loans. This to say: Let’s keep an eye on them, too.

Good luck as you continue learning the best and worst about our lenders. If you are wondering whether or not you meet the requirements to have student loans forgiven, check out the requirements for Federal and State student loan repayment assistance programs.

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