Do you know the difference between a federal student loan and a private one?
With the stock market imploding, knowing the correct answer is even more important now.
Why? Because it’s more likely that people with decimated college accounts are going to have to go into debt–or into greater debt–to pay for a bachelor’s degree.
While borrowing intelligently is critical, evidence abounds that many families don’t know how to go about it strategically.
Federal loans are the superior choice for families.
The best available deal for most students will be the Stafford loan. The interest on a Stafford is capped at 6.8% and needier students who qualify for a subsidized Stafford will pay 6% now and that will dip to 5.6% for new loans next summer. Eventually the interest rate on a subsidized Stafford will drop to 3.4%.
Moms and dads can borrow through federal PLUS loans which offer a maximum interest rate of 8.5%.
An alarming number of families aren’t taking full advantage of federal loans before signing the papers for private loans. And frankly, that’s disastrous because private loans can be far more expensive and they don’t provide borrowers with the same protections as federal ones.
Here’s what is really crazy: According to the Institute for Higher Education Policy, an astounding 20% of dependent student who recently borrowed through private loans never took advantage of federal loans.
Confusion has got to be a big part of the reason. Unfortunately, very few colleges are taking the time to really explain to families the difference between private and federal loans.
The few schools that have made the educational effort have experienced dramatic results. The financial aid office at Barnard College, for instance, began a policy of contacting families when they saw that they were preparing to borrow through private loans before taking full advantage of federal loans. The school’s volume of private loans plummeted by 73%. Colorado State University undertook a similar mission for its families.
I should also mention that another superior alternative to borrowing through private student loans is using your home equity.
To learn more about all types of student loans, visit the website of The Project on Student Debt. While there, you should take a look at the list of questions that anyone should ask a lender before taking out a private loan.
And be careful.
To learn more about my new book, The College Solution, please visit my website.