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 Private College Loans Can Be Cheaper Than Federal Loans

Many students and families have substantial college debt by the time of graduation. For many of those families, private college loans are much cheaper than federal student loans now—a reversal from as recently as one year ago. While the federal government has increased interest rates on its loans for the 2014-15 academic year, most private lenders have kept their rates steady for parents with high credit scores.

Interest rates on new federal Plus loans—which are often taken out by parents—have recently risen. Every borrower gets the same rate regardless of his or her credit score.

The largest private student-loan lender in the U.S. is Sallie Mae. There are many other private  lenders out there with two of the most popular being Discover Financial and Sun Trust Loans.

Stafford loans—the most popular federal student loans—still are cheaper than most fixed-rate private loans.

The lowest interest rates almost always are limited to loans that parents or other adults cosign, as lenders consider these loans to be less risky. Borrowers typically need a credit score of around 800 on a scale that tops out at 850, among other requirements, says Mark Kantrowitz, senior vice president at, a Las Vegas-based financial-aid website.

With a federal loan, you know the interest rate in advance. But borrowers won’t know the rate on their private loan until after they apply. Some lenders will allow borrowers to hold on to that interest rate for a short time while they decide whether to take that loan. Sallie Mae gives approved borrowers 30 days to make this decision.

Parents who qualify for the cheapest private loans stand to save thousands of dollars. On a $30,000 10-year private loan with a 6% fixed interest rate, for example, borrowers would pay about $9,967 in interest over the life of the loan, around $2,222 less than they would with a 7.21% Plus loan.

Also, most private loans don’t come with so-called origination fees, though most federal loans do. To net $20,000 in a Plus loan, say, you would have to borrow $20,896.89.

Rates are even lower on private variable-rate loans, which start at around 2.2% for borrowers with the best credit. But interest rates can change as often as every month, depending on the lender, and they typically move in tandem with the prime rate or the London interbank offered rate, the rate at which banks lend to one another, plus a premium.

Another thing to keep in mind: Private loans provide less repayment flexibility than federal loans that students take out. That could become a problem should borrowers run into financial hardship, such as a sudden job loss.

Federal student loans allow borrowers to shrink their monthly payments, a helpful strategy for those making less than they expected after graduation. They also allow for loan forgiveness, which is rarely offered by private lenders. Some lenders will reduce monthly payments, though that relief typically is temporary.

AnnaMaria Andriotis
Wall Street Journal
August 2014

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