10.28.08 | Federal Loans Take the Cake in Today's Economy
It is no secret that the current state of our economy is affecting the student loan industry. It is more difficult to obtain a loan, and you have fewer borrowing options. People ask me frequently why they should borrow federal loans before a private loan. The answer has always been because federal loans are less risk then private loans. Federal loans have fixed interest rates, and set deferment and forbearance options (making it easier for you to repay the loan, and harder to default on it). Currently, my answer to this question would be the same, except I would stress the interest rate factor. The majority of the private student loans have variable interest rates. They are either based of the LIBOR rate, or the PRIME rate. The LIBOR rate has gotten some recent press because it is set to increase in the current months. What this means for students who have private loans based off the LIBOR rate, is that their monthly payments will increase…making it harder and harder to repay that loan. USA Today has a recent article about the changing LIBOR rate. As stated above, federal loans have fixed rates…this means you will always have the same amount due every month for the life of the loan. This is very important, especially considering the current state of the economy, and the rising numbers of unemployment. But as so m of you know, federal loans are not typically enough to cover just tuition, never mind living expenses. Some students have no choice but to borrow private loans. But my advice would be don’t borrow blindly. Know the risk, know how much your monthly payment could balloon to…and make sure you will be able to pay that loan back, no matter what happens to the rate.
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