Informative Q&A [1,300 words] on student loans in WSJ with two experts in the field.
- For undergraduates comparing federal to private loans…
“Undergraduates who are borrowing on their own, without help from their parents, should always choose federal loans. They are cheaper—since everyone who gets approved gets the same fixed rate—and have better repayment terms. If borrowers are unable to repay the loans because of a low salary or unemployment, they can qualify for repayment options that will keep them out of default, which can ruin their credit. Federal loans have more of these options than private loans.
- How to compare private and federal loans (recall that federal student loans have annual and aggregate limits which is why some may seek private loans):
The first thing to compare is whether the loan has a fixed or variable rate. All new federal loans currently have fixed rates. Private lenders offer fixed and variable rates. The variable rates are the lowest, but could increase significantly over the next four to six years. Loan applicants should add four percentage points to the variable interest rate they’re being offered to get a ballpark estimate of the average interest rate they’re going to pay over the life of the loan, assuming a 10-year repayment term.
If you’re planning on paying off that private loan in just a few years, then a variable rate may save you money compared with a fixed rate.
Also compare loan fees. There is a 1.073% origination fee for federal Stafford loans and a 4.292% fee for the federal Plus loan. These fees may rise for the coming school year by a small amount depending on Congress. Most private loans don’t charge fees these days. Amortized over a 10-year term, 4% in fees is about the same as a one-percentage-point-higher interest rate.