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What’s the Difference Between Student Loan Types?

May 27th, 2008 admin

The Pay for College Blog just posted an article about how hundreds of students received bad loan checks from their private student loan company, Astrive. This mistake on Astrive’s part has meant lots of students have gone without loan funds to pay for college-AND they’ve had to pay fees for the bounced checks!

This incident got me thinking that since many of you will be taking out loans soon, it would be a good idea to go over the different types you can get. Deborah Fox, founder of the college planning company, Fox College Funding, has provided me with some expert advice on the subject:

Are You Paying Too Much?

Did you know that there is a difference (actually, several differences) between federal student loans and private student loans? Many students don’t get this information, and they end up accidentally skipping out on low-interest options-meaning they end up overpaying at a time when their bank account is still in its adolescent phase. Ouch!

Federal v. Private

Before we even look at the difference between these two types of loans, let’s set the record straight: federal loans (which come from, or are guaranteed by the government) are your best option when it comes to student loans. Private loans – known as “alternative” loans (which come from private lenders or banks that are not guaranteed by the government) should absolutely be your last resort!

Wondering why?

The basic answer shows up in dollars and cents: federal loans generally have lower interest rates than private ones and have a fixed rate rather than variable. This means you will likely pay less for the same loan amount when you pay it back. Nice right? Another reason federal loans are a better option is that they have a lot more built-in protections for you (the borrower) than private loans do. (For example, a check the government sends you is less likely to bounce!)

Borrowing Smart

There are several types of federal student loans-the Subsidized Stafford Loan (you don’t pay or accrue interest while you’re in school), the Unsubsidized Stafford Loan (you do accrue interest in school, but the interest rate is relatively low), and the federal Perkins Loan (reserved for students with the most need and at the most attractive interest rate: 5%) are all intended for students. Your school will let you know which ones you qualify for. It’s best to borrow them in this order (depending on which ones(s) you are able to get access to):

  1. Perkins Loan
  2. Subsidized Stafford Loan
  3. Unsubsidized Stafford Loan

Going Private

If you decide to borrow an alternative loan (one that comes directly from a bank or other lender), be sure you understand the risks and fees associated with it. Check the interest rate and see if it varies, find out if there is a penalty for paying the loan back early, and make certain that you understand all the loan terms. You might want to go over it with a parent or financial advisor to make sure you are getting the best deal.

Questions?

Student loans are pretty darn confusing, so please feel free to ask me questions–I have the luxury of being able to consult an expert! Thanks again to Deborah for sharing her expertise!

photo: Question mark by JoanaCroft

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