Higher education certainly comes at a price. According an infographic from The Wall Street Journal:

  • In 2014, nearly 70% of the undergraduate students had taken student loans. The corresponding figure for 2004 was 64%.
  • In 2014, the average loan amount taken out by undergraduates was $33,000. This number had also risen from $18,600 in 2004.
  • As of March 2014, the aggregate total of US student loan debt amounted to $1.2 trillion. In March 2004, the student loan debt had been $400 billion.

These numbers reveal how increasingly, a greater number of students are taking out student loans to pay for college.

Learning on Loan—Why People Prefer Taking Federal Loans

Traditionally, many students preferred taking federal student loans because they:

  • Don’t have to deal with variable interest rates, which could change over the life of the loan
  • Don’t need to start paying back the loan until they graduate or until they stop attending school at least half-time
  • Don’t need a credit record for securing a federal student loan
  • Don’t need to have a co-signer
  • Could qualify for having the government pay the interest on their student loans, especially if they have a greater financial need (i.e. Direct subsidized loans given to students whose family’s adjusted income is below $50,000)
  • Have the option of choosing from a variety of repayment plans
  • Have the option of having a portion of their loans forgiven especially if they work in specific jobs, for which there is a high demand i.e. public service
  • Could consolidate their loans into a Direct Consolidation Loan
  • Don’t need to pay a pre-payment penalty fee

In addition, federal student loans offer lower interest rates than most private loans. However, the hitherto straightforward comparison between federal student loans and private loans is not as easy as it used to be. The federal government recently increased the interest rates on student loans for the 2014-15 academic year. The revised student loan rates for 2014-15 are:

  • For Undergraduates (Direct subsidized and unsubsidized loans): 4.66% (up from 3.86% last year)
  • For Graduates (Direct unsubsidized Stafford loans): 6.21% (up from 5.41% last year) and,
  • For Direct PLUS loans: 7.21% (up from 6.41% last year)

While the government hiked interest rates, many private lenders kept their interest rates steady. Some lenders even provided lower interest rates for parents, who had high credit scores. As a result, many families could encounter a unique situation. They could find that taking a private college loan is much cheaper than taking a federal student loan.

Points to Ponder—Which Student Loan Should You Go For?

Regardless of whether you opt for federal or private student loans, you would need to evaluate the best deals on offer. Both have their pros and cons. Qualifying for the lowest interest rates on private loans might mean that you need to have a credit score of about 800. People with lower credit scores might have to settle for higher interest rates.

Parents who take a Direct Plus loan of $30,000 for 10 years at 7.21% APR would end up paying an interest component of about $12,189. However, if they took a private student loan of the same amount for the same term at about 6% APR (fixed interest rate), they would only pay $9,967. This means that over the life of the loan the private loan would end up saving them $2,222 in terms of interest payable. The absence of any application, origination or pre-payment fees is another cost-saver for borrowers taking private student loans. These fees could be quite a handful, depending on the quantum of loan you take. For example, you would need to take a Direct PLUS loan of approximately $20,897, to receive a net loan amount of $20,000.

Oftentimes, the financial aspect of student loans occupies the sole position in the minds of student loan borrowers. However, they would need to consider the other benefits of taking federal student loans too. Variable-rate student loan interest rates could change each month, depending on the lender. Some lenders do not place caps on the maximum that interest rates could reach. Others place caps at levels as high as 18% APR. A higher interest rate could make it difficult for you to keep the loan current.

Even in fixed-rate loans, borrowers would only know the interest rate they need to pay, after they apply. This is in contrast to the security of a federal loan, where you know the interest rate applicable in advance. Only a few private lenders like Sallie Mae allow borrowers to lock interest rates for a specified duration, until they decide to take the loan. Private lenders also offer less flexibility when it comes to repayment options. This could be problematic if the borrower experiences a situation of financial hardship.

Floating a Loan—The Private Options to Consider when Taking Student Loans

Several private lenders offer private student loan programs. These lenders offer lower interest rates than those levied by the federal government. However, please note that these details are accurate as of August 15, 2014. Lenders could change interest rates and other terms and conditions, without prior notice.

SALLIE MAE

Sallie Mae is undoubtedly the largest private student loan lender in the US. It has helped more than 30 million Americans pay for college since 1972. Students taking a Direct PLUS loan, need to pay a fixed interest rate of 7.21% APR. In contrast, Sallie Mae levies a fixed interest rate that ranges from 5.74% to 8.88% APR. Unlike the federal government, Sallie Mae also offers loans with a variable interest rate. Interest rates for these loans ranges from London Interbank Offered Rate (LIBOR) 2.00% to LIBOR 7.27%.

Sallie Mae student loans do not have any disbursement fees either. Students attending school full-time, half-time or less than half-time can avail of Sallie Mae’s student loans. Sallie Mae also offers a Smart Reward scheme with Fixed and Interest Repayment Options. Under this scheme, Sallie Mae student loan borrowers could earn a reward of two% of the scheduled loan payment amount. They would receive this for each on-time payment during the in-school and separation payment. However, the borrowers would need to stay current with their loan repayments.

CITIZENS BANK (OF THE CITIZENS FINANCIAL GROUP)

Citizens Bank offers TruFit Student Loans with terms ranging from 5–15 years. Their variable interest rates range from 2.65% - 9.40% APR. Similarly, their fixed-rate loan interest rates range from 5.75% - 11.75% APR. To qualify for the lowest interest rate, students need to apply with a co-signer, opt for a 5-year repayment term and make the scheduled repayments while in school.

Student borrowers could even avail of a 0.50%  point interest rate reduction. However, they (or their co-signers) would need to have an existing qualifying account at Citizens Bank, at the time of application. Citizens Bank offers a 0.25% point interest rate reduction for automatic debit enrollment. Thus, you could save up to 0.75% points on your student loan interest rate. The bank also offers flexible repayment options. Furthermore, Citizens Bank does not levy any application, origination or disbursement fees on its student loans.

DISCOVER FINANCIAL SERVICES

Discover Financial Services reduced its interest rates on student loans in June. It reduced its lowest interest rate on fixed-rate loans from 6.74% to 5.99%. Currently, its variable interest rate ranges from a 3-month LIBOR 2.74% (2.99% APR) to a 3-month LIBOR 7.74% (7.99% APR). Its interest rates for fixed-rate loans ranges from 5.99% APR to 10.74% APR.

Discover Financial Services has no origination fees. However, it requires a credit check. It also requires a co-signer, based on the results of your credit evaluation. Repayment plans last for a standard duration of 20 years. In addition, borrowers could choose not to make any payments until nine months after graduation or enrollment in school less than half-time. Alternatively, borrowers could also opt to make fixed in-school payments of $25. Furthermore, if students applied for a loan on or after May 01, 2014 and received the loan, they would be eligible for a one-time cash reward. The reward would comprise one percent of the loan amount. For this, they would need to secure a Grade Point Average (GPA) score of at least 3.0.

SUNTRUST BANKS

SunTrust Banks reduced their lowest fixed-rate interest rates from 4.75% APR to 4.00% APR. They are offering this reduced rate for student loan applications submitted until the end of August. Their current variable rates range from 2.491% APR to 8.009% APR. Similarly, their current fixed rates range from 4.001% APR to 9.771% APR.

SunTrust Banks offers a 0.50% point interest rate reduction for automatic debit enrollment. For this, borrowers would need to make the automated payments from a SunTrust account. They levy no application, pre-payment or origination fees. In addition, they offer a graduation reward as well. This reward comprises a one percent principal reduction based on the fully disbursed loan amount.

WELLS FARGO BANK

The Wells Fargo Graduate Loan has variable interest rates ranging from 2.97% APR (with discounts) to 8.74% APR (without discounts). Similarly, its fixed interest rates range from 6.12% APR (with discount) to 10.61% APR (without discount). If you have a previous Wells Fargo Student Loan or another qualifying account, you could earn a 0.50% rate reduction as well.

Wells Fargo does not levy any application, pre-payment or origination fees. Student borrowers do not need to make payments while in school. The repayment schedule commences after the borrowers leave or graduate from school. For applications received until September 30, 2014, Wells Fargo offers interest rate discounts if the borrower (or the co-signer) has certain products offered by the bank.

PNC FINANCIAL SERVICES

The PNC Solution Loan offers variable rate loans with interest rates ranging from 3.36% APR to 10.40% APR. Their fixed-rate loan interest rates range from 6.19% APR to 12.99% APR. The standard repayment term is for 15 years. Borrowers could either commence repayment while they’re in school. They could also opt for deferred payments. In the case of deferred payments, repayment commences six months after graduation.

The PNC Solution Loan offers a 0.50% point interest rate reduction. Borrowers could avail this by opting for automatic debit enrollment from their checking or savings accounts. Additionally, borrowers do not need to pay any application, pre-payment or origination fees.

Before you apply for a private student loan, ensure that you give due consideration to all aspects of the situation. Failing to do so could be a setback when it comes to repaying the loan. It could impact your credit history (as well as that of the co-signer). In the long run, this could be a costly mistake.

NOTE: This article is written from an outside source and does not necessarily express the opinions of iGrad.