Daily Aid 116: Private student loans vs. federal student loans, your thoughts

Student Financial Aid News

From the Chronicle:

“The percentage of students taking out private loans has increased by nine percentage points over the past five years, from 5 percent to 14 percent, according to a new analysis of Education Department data that was released last week,” The Chronicle of Higher Education reports. “The biggest jump in borrowing occurred at for-profit institutions, where the share of students with private loans grew from 14 percent to 43 percent in the years from 2003-4 to 2007-8, according to the analysis, which was prepared by the Project on Student Debt. … Among students taking out private loans, 26 percent did not use federal loans, up from 22 percent in 2003-4.”

Commentary

Not using federal student loans like the Stafford loan isn’t a great idea. Federal student loans come with things like a 3 year deferment entitlement which lets you postpone payments (at the cost of accrued interest) for up to 3 years if you run into hard times.

That said, private student loans are marketed well, and more importantly, during this down economy, are significantly less expensive with excellent credit than their federal student loan equivalents – for now.

Take a look at posted loan rates:

Stafford subsidized loans: 6.0% fixed
Stafford unsubsidized loans: 6.8% fixed
PLUS loans: 8.5% fixed
Best case scenario private student loans: 2.75% (Prime -0.5%) variable
Worst case scenario private student loans: 14.44% (1 month LIBOR +14%) variable

If you have the ability, due to fantastic, stellar, sparkling credit to take out a private student loan at 2.75% versus a Stafford loan at 6.0%, it doesn’t take a Ph.D. in math to figure out the better deal.

Virtually all private student loans are variable rate loans, which all but guarantees their rates will be higher at some point in the future, and lower again at another point in the future. If you have the ability and discipline to do so, borrow a private student loan as long as rates remain significantly below federal student loans – then when private student loan rates start to creep up within a percentage point or two of federal student loans, talk to your school’s financial aid officer about borrowing federal student loans to cover the full repayment of the private student loan.

If you know you don’t have the discipline and diligence to monitor student loan interest rates that frequently, then take out a federal student loan, as the interest rates are fixed, locked in, and never change. For a couple of years, they’ll be a higher cost in terms of interest rate than private student loans, but for a few years after that, they’ll be lower cost as the market naturally fluctuates.

Scholarship Update

Blue Ocean Institute and Lindblad Expeditions are pleased to announce the Kalpana Chawla Ocean Journey Scholarship. This scholarship will provide high school or college students with an enriching, hands-on field study experience at sea. The winner(s) of the Kalpana Chawla Ocean Journey Scholarship will embark on a 10-day Lindblad Expeditions voyage to the Galapagos Islands in the presence of scientists, naturalists, and researchers. Alongside these skilled specialists, they will use state-of-the-art exploration tools to take part in discovering stunning natural environments as they pursue their interests in marine biology, biodiversity, or oceanography. The expedition departs on July 10, 2009. Activities include snorkeling, exploring the islands on Zodiacs and gaining intimate views of Galapagos wildlife.

Details at our free college scholarship search site.

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