Going off to school can be one of the most exciting parts of a young person’s life. It’s an amazing opportunity to be able to attend college. But affording it can be difficult at times. Fortunately, there are grants and loans to help defray the costs. Here’s when it makes sense to take out private undergraduate loans.
The Difference Between Federal and Private Undergraduate Loans
Before digging into when it makes sense to take out a private undergraduate loan, let’s make some clear distinctions between federal and private student loans. The most obvious way of distinguishing these is that federal loans come from the government, while a financial institution offers private loans. One exists in the public sector—the other, as the name implies, private.
The differences between federal and private undergraduate loans, however, don’t stop at just the issuing organization. Federal undergraduate loans come in three forms:
- Direct Subsidized loans – These are available for those who show financial need, and the government will cover interest while the student is in school and up to six months after graduation. These are only offered to undergraduate students, and are generally the best possible loan arrangement.
- Direct Unsubsidized loans – These come with the same terms when it comes to federal loan interest rates (3.73% for undergraduates) as well as origination fees (just over 1%). However, Direct Unsubsidized loans don’t offer undergraduates the ability to not defer interest payments while in school.
- Parent PLUS loans – These loans are for students who aren’t able to cover their expenses with Direct Subsidized or Direct Unsubsidized loans for undergraduates. While Parent PLUS loans will cover any additional expenses as long as you can meet the credit requirements, they come with much less favorable terms. For starters, they currently have an interest rate of 6.28%, plus an origination fee of over 4.2%. These aren’t great terms by any means, especially since they have to be taken out in a parent’s name. Going this route can just unnecessarily complicate things, and land you with a loan that’s too onerous to pay off.
While there are certainly advantages to federal loans, private loans have their place too. When it comes to getting private undergraduate loans, it’s important to look for competitive rates that will at least beat out those of Parent PLUS loans. You might even find some private loans that come with a variable rate that’s lower than the fixed rates offered by the Direct Subsidized and Direct Unsubsidized loans. It’s important to understand how variable rates and fixed rates differ. Fixed rates will stay the same throughout the entire length of the loan, while variable rates will change with market conditions.
When Should You Get Private Undergraduate Loans?
The main reason you might want to take out a private student loan as an undergrad is if you can’t cover your expenses without having to resort to Parent PLUS loans. As already mentioned, the terms of Parent PLUS loans are less than ideal. It’s likely you’ll be able to find a better undergraduate loan from a private lender.
If you want to speed up the process of finding the best undergraduate private loan, check out Juno. It’s a service that takes bids from a huge body of lending organizations that want to gain the business of Juno’s members. They then select the best deals for various groups of people—such as undergrads. Doing this can help you find the right private loan in far less time. It’s free, but you’ll likely need a co-signer to get the lowest rates, especially as an undergraduate.
Having a cosigner with solid credit can make all the difference when getting a private student loan. Having someone lenders can trust to pay them back vouching for you will get you a much better rate on your loan. This will make your entire college experience (and adult life) more affordable and less stressful.