Questions about Private vs. Federal Student Loans

Facebook icon Twitter icon Print icon Email icon

By Mark Kantrowitz

June 2, 2020

During our webinar about Student Loans 101 (Repaying), participants asked dozens of questions about deferments and forbearances, grace periods, repayment plans, tax breaks, loan discharges, loan forgiveness and default. Here are the answers to many of the questions about repaying student loans.

If parents have to/want to borrow money to help their child pay for college, would you recommend a Federal Parent PLUS Loan or a loan through a private lender?

A lot has to do with a family’s specific circumstances. For example, will the family qualify for a private student loan? If so, will the private student loan have a higher or lower interest rate than the interest rate on a Federal Parent PLUS loan?

Do the parents want the student to be obligated to repay the debt, or just the parents? Do the parents need the added flexibility associated with federal loans?

There are, however, a few general principles worth considering:

  • Focus on free money first. Grants and scholarships do not have to be repaid. Loans have to be repaid, usually with interest.
  • It is cheaper to save than to borrow. Every dollar you save is a dollar less you’ll need to borrow. Every dollar you borrow will cost about two dollars by the time you repay the debt.
  • Borrow federal student loans first, because they are generally less expensive than parent or private loans.
  • If you need to borrow private or parent loans, you may be borrowing too much. Keep student loan debt in sync with income. This means the student should borrow no more for their entire education than their annual starting salary. It also means the parents should borrow no more for all their children than their annual income.
  • Shop around and compare differences in interest rates and repayment terms. Base your comparisons on the actual interest rates you are offered, not the best advertised interest rates.

A good place to start:

See the best 529 plans, personalized for you