How to Choose a Student Loan for College: Should an Undergraduate Apply for a Federal Loan or Private Loan?

A university education is one of the most expensive investments most people are likely to make. There are three main types of loan available to help with these costs, including federal loans that come direct from the government, federal loans that are made by banks and backed by the government and private loans with no government backing at all.

Perkins Loans

The Perkins loan is available to undergraduates in greatest financial need, such as low-income students. This should always be the first choice for those who qualify because the maximum rate of interest is currently capped at 5%.

Stafford Loans

Two types of Stafford loan are available to undergraduates. Whilst the first type is open to everyone, a second subsidized federal loan is also available to students in genuine financial need. The beneficiary not only pays a lower interest rate, any interest accrued is paid by the government until they leave college. The maximum rate of interest is currently capped at 6.8% on standard loans. Subsidized Stafford loans, where the interest is paid by the government, is capped at 6%.

PLUS Loans

Parents can take out Parental Loans for Undergraduate Students or PLUS loans. This particular student loan can be taken out to cover ‘attendance costs’. The definition is broad and includes tuition fees, books, room and board, transportation and miscellaneous expenses. The maximum rate of interest on a direct loan is currently capped at 7.9% and 8.5% if from a bank or non-government lender.

Private Loans

Undergraduates that require more money than is available through a federal loan will need to try to identify a suitable private loan. They work in the same way as any other method of bank lending, although the rate of interest will be higher than on federal loans. Rates are also variable. Whilst the forms are easier to complete, there are also fewer options available in the event of student loan default.

Undergraduates should always seek a federal loan because they offer a lower rate of interest and more options in the event of both financial difficulties and student loan default. The Perkins loan is preferable, but there is a means test which means that not all will qualify for the discounted rate. Student loans cannot be written-off by filing for bankruptcy so they will need to be re-paid. Students are also reporting that private loans are difficult to find in the current economic climate.

Readers seeking ways to address financial difficulties prior to student loan default may be interested in identifying alternative ways to make student loan repayments.