Don’t be lured by the promise of low interest rates, there’s a variety of reasons you should never choose private student loans before federal student loans when funding your education.
Taking out private student loans over federal student loans is like getting a tattoo when you’re drunk – it’s ugly, you’ll regret it and you’re pretty much stuck with it forever. But, just like people will continue getting drunk tattoos, people will continue taking out private student loans without understanding the long-term implications of doing so. Before taking out a private student loan, take some time to consider the differences between private and federal student loans and the protections and benefits that are guaranteed by government backed loans that private lenders don’t offer.
Federal student loans offer a variety of repayment plans – most importantly for graduates earning meager salaries, income based repayment plans. Repayment plans based on your income include the Income Based Repayment Plan (IBR). If you enroll in IBR, your monthly student loan payment is limited to 15% of your disposable income. Note that that is your “disposable income” not your “income” – disposable income being your AGI multiplied by 150% of the poverty level for your family size (usually somewhere around $12,000 if you’re single and $16,000 for a family of two). You can essentially have a monthly repayment amount of $0 – what private lender is that accommodating to your financial struggles?
For those of your working or planning to work for a public service employer, if you have federal loans you can enroll in the Public Service Loan Forgiveness Program and have your student loans forgiven (tax free!) after ten years. Yes, in a short ten years you could be free of your federal student loan debt. Another point for Uncle Sam.
Imagine if you took out thousands of dollars in student loans to attend a school – but the school closes. What now? If those loans are private, you’re most likely stuck paying back the student loans you borrowed to attend a school that no longer exists. Damn. If those loans were federal, guess what? Discharge! Yes, you will no longer have to pay off the federal loans you borrowed to attend a school that closed before you finished your program. Private student loan lenders don’t offer this protection.
Another benefit of having federal student loans? Forbearance and deferment. These both allow you to postpone your student loan payments due to being suddenly unemployed, enrolled in school or – among other things – are on active duty in the military. Private lenders might hesitantly work with you for a few months if you’ve become unemployed or are facing financial hardship – Uncle Sam allows you up to three years of payment postponement in certain situations.
If you think you’re stuck borrowing private loans because you’re no longer eligible for federal student loans due to defaulting on existing loans or a drug possession conviction – think again. You can renew your eligibility to borrow federal loans. Don’t think you’re eligible for federal student loans do to citizenship requirements? Ask, don’t assume.
These are just SOME of the benefits and protections that come along with borrowing federal student loans instead that aren’t offered by private student loan lenders. Borrowing student loans is almost a necessity to afford the high cost of tuition today – be informed before you borrow to minimize regrets and problems down the road.