With another academic year upon us and many students beginning to ready themselves for their first year of university starting in the Fall this year, prospective students need to decide on how they are going to finance their tertiary education. While some may be fortunate enough to receive scholarships or financial aid, or have their parents pay for their education in full, many need to decide on which route to go about taking out a student loan.
Federal and private loan options
When it comes to taking out student loans, there are generally two routes that you have available to you as a student: either taking out a federal loan or a private loan. The main difference between the two is the organization that lends you the money. A federal loan is provided by the U.S. government, usually with a fixed interest rate and various repayment options. Private loans are given by private financial institutions like a bank or credit union. These often come with higher interest rates and less flexible repayment terms.
Currently, 92% of student loans are federal while the remaining 8% come from private loans. The current outstanding federal student loan balance is $1.693 trillion, with 42.7 million student borrowers having federal loan debt. The average federal student loan debt balance is $38,375, however, the total average balance if you include private loan debt is closer to being over $41,000. Student loan debt in the United States is over $1 trillion.
Advantages of a federal loan over a private loan
In terms of picking which route you want to go with, federal loans offer numerous benefits over private loans. According to the official Federal Student Aid website, your payments are not due until after you graduate, ensuring that you do not have to study while working to pay off your debt at the same time. They also come with fixed interest rates, income-driven repayment plans, and deferment options. The loans are often also subsidized, meaning the government will pay the interest that you owe while you are still in school.
Private loans on the other hand, often have higher higher interest rates, require credit checks, and offer fewer repayment protections. They are also usually not subsidized, meaning you are responsible for the interest incurred from the start. Another major benefit of federal student loans is that if you decide to go work in a public service career after you graduate, your federal student loan debt can be forgiven.
Because of the increased flexibility and options for loan forgiveness and subsidization, federal loans are often the safer route for a student to take if they need to take out loans to pay for their education. It is critical that if you are going to find yourself in debt as a young person, you need to be smart about how you are going to repay your loans as your financial future is on the line.
Debates of total student loan forgiveness
Conversations surrounding total student loan forgiveness have been circulating for years now. During President Biden’s recent presidential term, he attempted to pass a bill that would have provided blanket student loan forgiveness to all students. However, it was rejected by the Supreme Court. Despite this, the Biden Administration forgave the student loans of over five million individuals during his term in the White House.
With the new Trump administration coming in for a second, non-consecutive term, there are expected changes for policies on student loan forgiveness. President Biden’s Saving on a Valuable Education (SAVE) income-driven repayment plan will most likely be stopped by the Trump administration, meaning that if you are currently readying yourself to roll into a repayment program for your federal student loans, students are advised to enroll into the Income-Contingent Repayment (ICR) and Pay As You Earn (PAYE) plans.
