Student Loan Boxing Match: Federal vs. Private Loans
Let’s get ready to rumble! Today's boxing match promises to be a classic with two paying-for-college financing options that many students consider. In the red corner, we have the old-and-reliable US national champion known as the Federal Direct Student Loan. And in the blue corner, we have the up-and-comer contender, Private Student Loan.
Each loan has some interesting features that makes them a winner for specific borrowers. Tonight’s prize? To have the honor of lending $10,000 to a third year undergraduate college student. We all want a good clean fight, so nothing below the belt. Good luck to both loan types. (bell rings)
Well, Private Student Loan comes out fighting strong with an assortment of interest rates - both variable interest rates and fixed variable interest rates - making it interesting to compete against the Federal Direct Student Loan with a one-size-fits-all fixed interest rate set annually based on the May sale of the US 10-year Treasury Bill. The actual interest rate a specific borrower gets is typically based on their (and most often a co-signer’s) creditworthiness. As of June 2020, we’ve seen Private Student Loan with variable interest rates from lenders like College Ave Student Loans as low as 1.49% and fixed interest rates as low as 4.39%. However, Federal Direct Student Loan is looking pretty confident with his 2020-21 fixed interest rate of 2.75%.
Private Student Loan caught Federal Direct Student Loan totally off guard with his second punch of no loan fees. Federal Direct Student Loan became a bit dazed trying to compete with his 1.059% loan fee deducted from each disbursement. Since the fee is about $53 for a $5,000 student loan, Federal Direct Student Loan is treating this as only a graze.
Private Student Loan seems eager to show his all stuff right away with his flexible loan repayment lengths from 5 to 15 years that the borrower typically choses upfront. Federal Direct Student Loan doesn’t seem phased at all. Although the standard repayment length is 10 years, Federal Direct Student Loan offers a variety of repayment plan options in Graduated, Extended, and Income-driven repayment plans that could for higher debt borrowers could extend repayment for up to 25 years.
Federal Direct Student Loan fights back with a no prepayment penalty. But Private Student Loan just laughs and confirms she typically has no prepayment penalties as well.
Despite Private Student Loan showing some early dominance against Federal Direct Student Loan, Federal Direct Student Loan lays it on hard with her subsidies. For those student loan borrowers who demonstrate financial need, the government will subsidize the loan - that is - pay the interest while the borrower is in school at least a half-time basis and during certain deferment periods. This blow puts Private Student Loan to the canvas, but she quickly gets back on her feet.
Next Federal Direct Student Loan clocks Private Student Loan with her repayment start date. As long as the student is enrolled at least half-time and maintaining academic progress, the student loan borrower will not enter into repayment until six-months after graduation. Private Student Loan gets annoyed because sometimes she requires at least interest-only payments from the point of disbursement.
Federal Direct Student Loan continues the comeback in a big way with her deferment options. These periods of time were repayment is postpone repayment are impressive like:
- in-school when borrowers are enrolled in at least half-time
- six-month grace period after they graduate or cease to be enrolled for at least half-time
- enrolled in a approved disability rehabilitation training program
- serving in the Peace Corps for you to three years
- unemployed for up to three years
- active duty military service in connection with a national emergency, military operation, or war or 13-month period following the conclusion of their active duty military service in connection with a national emergency, military operation, or war
Private Student Loan claps back with limited forbearance options to reduce or postpone repayment as well. Federal Direct Student Loan gets steady on her feet and shows a huge grin. She quickly reminds Private Student Loan that she offers forbearance as well deferment.
Looking empowered, Federal Direct Student Loan lands another punch front and center with loan forgiveness - a release of the borrower from the financial responsibility to repay all or a portion of a loan based on working as a teacher or in an area of public service. Private Student Loan seems to have been hit with a knockout blow as she falls to the canvas again.
One .two…three… Wait. Private Student Loan shows signs of life and gets up on her knees. As Private Student Loan rises, she reminds Federal Direct Student Loan about annual loan limits. As a third year college student, the dependent student loan borrower is only eligible for $7,500 in Federal Direct Student Loan funds. Since the borrower needs $10,000, Federal Direct Student Loan can’t help the student on its own. She pleads with Federal Direct Student Loan to consider whether there has to be just one winner.
All of a sudden, the bell rings.
The crowd grows quiet as the judges are brought. Although both loan types may be discouraged that neither got a knockout, they wait for the judges call. Typically, the judges will award the round to the better features that meet the student loan borrowers need.
In an unprecedented, the judges come back with a win-win. They suggest the borrower takes out both loans - maximize Federal Direct Student Loan by borrowing $7,500 and borrow the remaining $2,500 in Private Student Loans since the borrower has a creditworthy co-signer.
The crowd goes wild. What a great match up! The third year undergraduate college student had his borrowing needs met with two different loan types.
Colleen MacDonald Krumwiede is a financial aid and paying for college expert with over a decade of financial aid experience at Stanford GSB, Caltech, and Pomona College and another decade at educational finance and technology companies servicing higher education. She guides go-to-market strategy and product development at Quatromoney to transform the way families afford college.