Money Matters: New federal student loan interest rate could make private loans more palatable
With interest rates on federal student loans, under some circumstances private loans may be an alternative worth considering. Tara Lynn Wagner filed the following report.
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When it comes to paying for college, expert advice has long fallen in this order: first, look for free money like grants and scholarships first, then turn to federal loans, and finally, if necessary, private loans. But recent and potential future changes could be shaking up those ranks.
This summer, the interest rate on the most affordable student loan, the Federal Stafford loan, is set to double from 3.4 percent to 6.8 percent.
At the same time, private lenders have begun advertising loans with fixed rates that are are comparable if not lower than what's being offered by the government.
"So to give you an example, the interest rate on Sallie Mae's new fixed-rate loan, it was introduced last month, starts at 5.75 percent. Well, that is significantly lower than the potentially 6.8 percent the federal government will be charging," says AnnaMaria Andriotis, a senior writer at SmartMoney.Com.
But Andriotis says don't turn your back on Uncle Sam just yet! Federal loans tend to offer more consumer-friendly options, like the income-based repayment plan.
"If you graduate college and you get a job that doesn't pay very much, you only pay a percentage of the income that you are actually making. That option is not available on the private loans," says Andriotis.
Also, with private loans, the lowest rates are only available to borrowers with the highest credit scores and that is not usually college students, who have little to no credit history. Federal loans, on the other hand, offer one rate across the board.
"So that 6.8 percent that is given to all borrowers, regardless of whether they have a high-credit score, a low-credit score, no-credit history. So that's another thing to consider," says Andriotis.
However, there is a loophole. College students may get the lowest possible rate on a private loan if they can get mom and dad to co-sign it. But beware...
"No matter what happens in the future, the parent is on the hook for it. Even if the student decides, you know what I'm not going to pay anymore, I can't afford to, I don't want to, it's still on the parent's record," says Andriotis.
It's a circumstance that will continue to effect finances long after the pomp of graduation is over.