There are many reasons to consider federal student loans over private or alternative commercial loans. (Here's a quick look at your federal loan options.)
First, federal student loans include a choice of repayment plans. The standard 10-year repayment plan has the highest monthly rate but you accumulate the least amount of interest. You can also choose an extended repayment plan (lower monthly rates but greater interest) or a graduated plan in which the monthly payments begin at a lower amount and increase over time. Finally, you can also choose Income-Based Repayment, which takes your income and family size into account in assessing your ability to pay.
Second, you can consolidate your federal loans. This simplifies the repayment process—and reduces the chance of a late or missed payment—by combining several loans into a single new loan.
[Learn more about student loans.]
Third, if you need it to avoid delinquency (a late payment) or default, when you have federal loans you may enter into deferment (a temporary suspension of loan payments for specific situations such as reenrollment in school, unemployment, or economic hardship) and forbearance (temporary suspensions of a borrower's payments because of financial difficulty). These options may be harder to enter into, and may not even be available, for your private loans.
Finally, only borrowers with federal loans are eligible for a wide variety of government loan repayment programs, including Public Service Loan Forgiveness. To learn how Public Service Loan Forgiveness works, register for our free Friday, July 8 webinar: Drowning in Debt? Learn How Government and Nonprofit Workers Can Earn Public Service Loan Forgiveness.
Why do students take out private loans? In some cases, it's because they have no choice. Especially if you're an undergraduate, it might be impossible to fully finance your college education with federal loans. (This is usually not the case for graduate students with their access to Grad PLUS loans.) But it is often the case that some students take out private loans simply because they are offered by their college.
[Learn about the best loans for grad students.]
Ed Money Watch recently conducted a study using Department of Education data available on the Federal Education Budget Project (FEBP) website to examine the top 100 colleges in terms of nonfederal loan borrowing in 2009. The FEBP website has higher education data on every state and institution including information on federal financing, demographics, outcomes, and financial aid use.
While the non-federal borrowing data is not perfect—for examples, it only looks at full-time, first year students; doesn't distinguish private loans from state and lower-cost institutional loans; and schools can't keep track of borrowing when students obtain loans directly from lenders—the data is still helpful.
What it indicates: at all of the schools in the top 100 for non-federal loan borrowing in 2009, more than half of first-year students received a nonfederal loan. Ed Money Watch found 18 of the top 100 were nonprofit colleges, while the remaining 82 institutions were for-profit colleges. (For-profit colleges are post-secondary institutions run by private, profit-seeking companies or organizations that operate as businesses.) The majority of the for-profit colleges listed in the top 100 for nonfederal loan borrowing were part of larger companies with dozens of campuses.
Here's the takeaway: Ultimately, you are responsible for repaying your educational debt, and you should make the decision that is best for your long-term financial future. Do your homework, and if you find that the best loans for you are federal loans, make sure you demand those loans regardless of whether your school offers them to you. Any post-secondary institution should be able to provide you with the information you need to apply for federal loans.
Isaac Bowers is the senior program manager for Educational Debt Relief and Outreach at Equal Justice Works. He was previously an attorney at Shute, Mihaly & Weinberger LLP in San Francisco, where he focused on environmental, land use, and planning issues. A graduate of the New York University School of Law, Bowers also has extensive experience in nonprofit advocacy and outreach.