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Tuesday, January 13, 2015

Once a Hater, Now a Lover. Why you should love private loans as well.

I have long been an opponent of private loans as I mentioned in this post.  But I have to eat my words, some what.  For undergraduates, this year, direct federal loans can't be beat.  They are 4.66% fixed, for both unsubsidized or subsidized. The lowest fixed rate I saw was sallie mae at 5.74% but that can get all the way up 11.85%.  Ironically, the same lowest rate applied for graduate students but the max for them is much lower, 8.56%.   And the rate for federal loans for graduate students are 6.21%.  You also have to keep in mind that federal loans have an origination fee, but private loans do not.  So, if you have a good FICO score and are a graduate students there is no reason to get a federal unless you plan to use income dependent repayment.  You could have a .47% lower rate plus, you would not have to pay up to 1% of the loan back to the government.

Let's assume you needed had a choice of pulling out $5500.  If you took out a federal loan you would only get $5,445 and your monthly payment would be $61.64 assuming you paid the interest of $28.46 every month before you graduated.  But if you pulled out $5500 from sallie mae, you'd pay interest of  $26.31 until you graduate and $60.35 as your monthly payment after graduation.  Plus you'd have an extra $55 in your pocket.  Over the lifeline of the loan, if you took 10 years to pay it, you'd owe $1741.48 (not including however years you spent in school) vs $1,897.15 for a private loans.

Now I am not a fan of private loans, I'd much rather go with a federal loan because you have more options, for example interest only for a period of time or income dependent repayment but can you really turn down an extra $210?  I can't.

And that assumes you can want to be the most conservative and get fix rate.  There are 2.75-3% variable rate out there for private loans so if you have gotten a job set up before you graduate and want to kill off your loans quickly, those can be an even better help.

This all assumes you have a good credit score, which for most undergrads is not true.  But lucky for them, the government is offering decent rates.  For graduate students, we don't have subsidized loans and rate are insane.  Time to look to industry for help, not the government.


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