In Today's Market Is A Private Loan Better Than A Federal One?

In Today's Market Is A Private Loan Better Than A Federal One?

At this time last year the prime rate, which is the benchmark widely used to determine the interest rate on a number of loans, was a respectable 6%. Today, that rate is a jaw dropping 3.25%, the lowest it's been since 1955. To put that in perspective Dwight Eisenhower was our President, a first class postage stamp cost 3 cents, and Marty McFly was desperately trying to get back to the future. I guess the more things change the more they stay the same. But how can you benefit from a low prime rate?

Many private student loans are tied to the prime rate index, and since the prime is at historic lows the cost of borrowing is significantly lower than it has been in years. This fact has parents and students debating whether they should take out a private or federal student loan. Undoubtedly your qualifications and priorities will serve as your guide when making this important decision, but there are some key factors and benefits to consider during your deliberation process.

Private loan benefits - No origination fees - Interest rate ranging from ½ point below prime to 4.75 points above prime - 2% cash reward on your outstanding principle balance at graduation - Payments deferred until after school

Federal loan benefits -Fixed interest rate with predictable monthly payment - Three years worth of deferment potential - Loan Forgiveness for qualified borrowers -Payments deferred until after school

Information provided by the Student Loan Network for general information purposes only.

As you can see, variable interest rates for private student loans start at 2.75% (because the prime is 3.25% and rates start 1/2 point below prime). However, the catch-22 for many Americans is that while this favorable rate exists it is not attainable.

Low interest rates are reserved for those with strong FICO scores, an endangered group which dwindles by the day. Millions of Americans have been defaulting on loans over the past 18-months sending their credit score into a damning abyss. A compromised credit score essentially disqualifies you from the most salutary interest rate in the market. And it's not just the borrowers with a scar on their credit history that are facing new hurdles; the pinch is being felt across the board. Those with stellar credit are adjusting to new requirements as well.

Most lenders, regardless of the individuals credit score, are requiring a co-signer on all applications to protect themselves. But finding two credit worthy applicants is a harrowing task in today's market, which makes federal loans the only realistic option for many desperate students.

Federal loans serve as a dynamite need-based option for those seeking funds for school. You don't need a co-signer, and eligible students can actually qualify for more funds if their parent or guardian has poor credit. To qualify for a federal loan you must complete a FAFSA, and must also attend a qualified Title IV school. That said, federal loans do have a few drawbacks.

First off, the maximum yearly allotment is relatively small in relation to the cost of tuition, and will most likely only cover a fraction of the tuition cost. Next, the interest rate is fixed and can not be decreased for the life of the loan. Third, some lenders charge a 1% origination fee off the topic. And lastly, many feel the current Stafford loan rates, which range from 6% to 6.8%, are outlandishly high in this market.

As you can see each loan type has its advantages and disadvantages. Just be sure to do your homework before you sign on the dotted line. If you do you'll be sure to ace your tests inside and outside of the classroom.