By AnnaMarie Mock, CFP®
The first two articles in the series, “Understanding Your Federal Student Loans”, provided an introduction to student loans, how to evaluate your loan options, and incentives associated with Federal loans. The final article, Part 3, in this series will explore the alternatives to traditional, federal student loans.
Generally, students should only consider obtaining a private education loan if they have maxed out the federal loan options. Although federal student loans are typically the most affordable, it may not be a complete solution for every student because there are limits on how much can be borrowed each year. There are alternative options that can cover the gap between college tuition and the federal aid received.
Alternatives to traditional debt:
Unlike federal student loans, private student loans are funded by banks, credit unions, and other types of lenders. Private student loans offer various loan terms, interest rates, and repayment options based on the type of degree being earned. Lenders can have several elements impact the borrowing terms where interest rates will vary based on the borrower’s and co-signer’s credit. There could be a maximum annual or total limit that can be borrowed from the lender which may even aggregate the total amount borrowed between private and federal loans.
There are four key areas to compare when selecting a private loan: product offerings, eligibility, cost, and miscellaneous benefits. Research the lender’s eligibility requirements to ensure that you are likely to qualify for the loan that fits your needs. There may be an origination fee or other annual fees associated with the creation and maintenance of the loan. Some benefits to lessen the burden of repaying the loan are not offered on all private loans like a lower interest rate, improved service, autopay, early repayment options, etc., so review all the terms of the loan before signing.
Another option is peer to peer lending which has transformed into a viable supplemental option for borrowing. It provides a formal structure for you to ask your social networks or unaffiliated third parties to make loans. This formalizes the entire process and usually settles on terms that may be more favorable than traditional private loans through a bank. Some providers include Lending Club, People Capital, Green Note, and Sofi.
One of the downsides to private and peer to peer student loans is the interest is not tax deductible. Under the final iteration of the Tax Cuts and Job Act of 2017, student loan borrowers can still deduct up to $2,500 of the interest paid directly from their taxable income for Federal student loans only.
Another downside to private and peer to peer student loans is you lose the protection that is associated with federal loans like flexibility with different repayment options and loan forgiveness. Please be aware that once you leave the federal program, you cannot return and are no longer eligible for the popular federal income-driven repayment plans.
Federal and Private loans are not created equal. Knowing and understanding the dynamic of your student loans is an important step in navigating the path to ﬁnancial success.
If you have any questions about the repayment options offered, please contact a member of the HIGHLAND team.