This is part two of MyBankTracker’s primer on how to safely take out a student loan. Part one, which focused on the difficulties of escaping a big student loan, can be found here.
An Important Decision: Federal Or Private Loans?
A number of student loan options exist, both federal and private. But all loans are not alike, meaning you should carefully research you’re the options before deciding.
The main difference between federal and private student loans are the interest rates. If you choose federal loans, you will typically pay no more than 6% interest. Also, federal loans come with fixed rate interest, so you will pay the same rate for the duration of the payback period. In 2009, the average interest rate on a private student loan was 12%. You could be faced with higher (or lower) interest rates on a private loan, because they are not fixed.
Given the higher interest and relative unpredictability, why choose private student loans?
Education loan debt
College tuitions and costs are growing much faster than the maximums on federal student loans, leaving private loans the only option for many students. Federal loans are capped at $27,000 per four years for students dependent on their parents and $45,000 per four years for independent students. With tuition costs growing at approximately 6% per year, federal loan limits have not been able to keep pace.
If you choose federal loans, you will have to decide between three options: Stafford, PLUS and Parent Loans for Undergraduate Students, each with different interest rates and requirements. The Parent Loans for Undergraduate Students are low-interest loans that typically go to students with exceptional financial need, while Stafford loans require no credit checks but require higher interest payments. PLUS loans have moderate interest and can start to be paid back just two months after a student starts school.
Which Students Owe The Most And Least?
The College Board released last month a study on which kinds of students racked up the most debt over the course of their college careers.
The study found that students who went to for-profit four-year schools generally owed the most. More than half (53%) of for-profit four-year students picked up cumulative debt of $30,500 or more, compared with 24% of private not-for-profit four-year students and 12% of public four-year students.
Predictably, the study found students who had attained an associate degree or certificate owed less student loans at the end of their studies. More than half of students who earned associate degree had no debt, while just 34% of bachelor’s degree earners were debt-free.
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