Private Student Loans vs. Government Student Loans: What’s the Difference?

September 27, 2019

If you are looking forward to going to college and you know you need financial help, you may not give much thought to whether you should take out private student loans or federal student loans. Either way, you will end up with debt, right? The truth is, deciding between private and federal government student loans is not as simple as comparing apples to apples. Your financial future could be affected by your understanding of how these loans differ.

Government Student Loans

Federal loans for students are made by the Federal Government’s Department of Education. When you apply for this type of loan, you must submit a Free Application for Federal Student Aid (FAFSA) form. The information on this form will be used to determine i) how much federal student aid and what types of federal loans you qualify for and ii) your family’s contribution toward the cost of your education.

Private Student Loans

Any loans that are not issued by the federal government are defined as private student loans. Private loans are made by various types of lenders, including banks, credit unions, and lenders that specialize in loans to students. If you don’t meet the criteria set by the lender, you can still get a private loan, but you will need a co-signer who meets the lender’s requirements. In the event that you miss payments or default on the loan, your co-signer will be responsible for your debt.

The Difference in Interest Rates

Government Student Loans – Interest rates on federal loans do not depend on financial factors such as your or your co-signer’s credit rating and are therefore the same for each borrower. Also, the rate on newly originated Federal Direct Loans does not change throughout the repayment period. Currently, interest rates on federal student loans are based on the 10-year Treasury Note plus a fixed percentage increase depending on the loan type, with a cap set depending on the loan type. For example, direct undergraduate loans are based on the 10-year Treasury Note + 2.05% and are capped at 9.50%, according to the Congressional Budget Office. Student loan rates are set in the spring for each new school year, and they are effective from July 1 to June 30 of the following year.

Private Student Loans – Interest rates on these loans are set by the lenders and are based on various underwriting criteria including the credit history of you or your co-signer. This means that you may be able to qualify for private student loan interest rates that are lower than government loan interest rates. Additionally, you could be offered a private loan with a variable interest rate rather than a fixed interest rate. Although a variable rate means your rate may go up when you are repaying your loan, the rate could still beat what you would be paying if you had federal loans.

The Difference in Repayment Terms

Government Student Loans – The repayment terms for federal student loans depend on whether they are subsidized or unsubsidized. Subsidized loans are ideal because the federal government will cover the interest while you are finishing school or in deferment, whereas unsubsidized loans begin accruing interest as soon as they are taken out. Federal student loans also offer options of deferment and forbearance as well as income-driven repayment plans, making these types of loans slightly more accommodating if you may have trouble paying your student loans.

Private Student Loans – Private student loans come with different repayment plans depending on the lender. A private student loan from ELFI gives you a choice of several attractive repayment options including deferring repayment until six months after graduation. With terms ranging from 5-15 years, you can choose between having lower monthly payments or paying off your loans quicker.*

The Difference in How Much You Can Borrow

Government Student Loans – The government sets a cap on how much you are allowed to borrow both for each year of college and cumulatively.

Private Student Loans – At ELFI, we encourage all individuals to explore all scholarship and grant options available. We always advise potential students to go after the “free money” first, as there are thousands of scholarships and grants you can take advantage of each year.

After taking advantage of scholarships and grants, the full cost of your education may not be entirely covered. The next step is to look into Private Student Loan options to cover the remaining amount you need for your education expenses. If you have reached your limit with respect to federal loans, you can also make up the difference with private loans. Private student loans from ELFI can help to bridge the gap.*

Choosing Between Government Student Loans and Private Student Loans

It’s important that you consider all of the differences when deciding which types of loans are best for you. If you need assistance in working through your options, contact ELFI. We have years of experience devoted to helping students realize their college dreams, so don’t wait – give us a call today.*

*Subject to credit approval. Terms and conditions apply.

NOTICE: Third Party Web Sites

Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – The bank is not responsible for the content. Please contact us with any concerns or comments.

Tuition

Average Cost: $10,440 (public) | $36,880 (private)*

Tuition is the amount you pay your university to enroll in classes. The total changes based on the number of credit hours you take and if you take courses with additional charges like science labs or residential academic programs that let you attend smaller classes in your dorm. Offers like the Western Undergraduate Exchange (WUE) can help students save money by providing in-state tuition to out-of-state students. Despite programs like this, the average cost of college is always rising because tuition increases each year based on inflation, school budgets, and a variety of other factors. Mandatory fees are lumped into tuition and include contributions toward campus construction and access to things like:

Student rec center
Athletic events
Career services
Student activities
Computer labs
Bus passes
Etc.

Room and Board

Average Cost: $11,510 (public) | $12,000 (private)*

Many colleges require you to live on-campus for at least your first year of attendance. The benefit of this requirement is that you’re close to classes and resources, including dining halls and bodegas that can be paid for with your room and board fees. These costs aren’t typically part of the bill for community colleges or schools with a high population of daily commuters. However, students will still need to cover living expenses like rent, utilities, and groceries if they chose not to live at home with their parents and amounts vary based on eating habits and geographic locations. For example, rent in California is higher than in Tennessee and the general cost of living in an urban setting is higher than it is at a rural school.

Books

Average Cost: $1,240 (public and private)*

Books can be a secret killer when it comes to college expenses. No one ever anticipates the sticker shock associated with their first $300 textbook. These costs also include necessary technology like tablets or laptops for note-taking and essay writing. It also can include special supplies like graphite pencils and drawing paper for art majors or scrubs or stethoscopes for nursing majors. These semesterly shopping trips can do real damage to your checking account and add to the average cost of college.

Transportation

Average Cost: $1,230 (public) | $1,060 (private)*

So far, we’ve focused on what you’ll need to pay to get by on campus, but we haven’t talked about the expenses associated with getting to campus. These costs impact resident and commuter students and range from airplane tickets and bus fare to parking passes and tanks of gas.

Financial Aid

When factoring the average cost of college, the other side of the ledger is represented by financial aid in the form of scholarships and need-based grants. With these awards, that don’t have to be repaid, the cost of tuition is reduced. In addition to scholarships and grants, federal and private loans are available to help cover the cost of college. Private lenders offer student loan options for undergraduate students, graduate students, and even parents. Loans cover everything from tuition to personal expenses that you’ll occur during your college years, like cell phone bills, clothes, laundry, or even a bed for your apartment. The biggest thing to keep in mind when taking out loans is to borrow only what you’ll need. It’s necessary to have money to pay bills while you’re a full-time student, but borrowing too much can put you in a bind when it comes time to pay back those loans.

Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.

2019-11-12

What is Early Decision for College?

If you, or your son or daughter, are currently applying for colleges, you live in a world of deadlines. There are ACT registration dates, SAT prep dates, application deadlines, and scholarship due dates. When you live by the calendar, it can feel like torture waiting to hear back from schools, especially your top choice. Some colleges have early decision options that help push the application and admissions process along. What is early decision? Students can elect to apply early decision to (typically) one school as early as November, and can subsequently hear back from that school in just a few weeks. There’s more to the agreement though… Let’s dig into the details to see if this application option is right for you.

What is Early Decision?

Early decision is available at many private colleges and universities, and some public schools also offer this option. Certain highly selective programs like Ivy League schools can limit students to only one early application. Through this option, prospective students submit applications in early- to mid-November and hear back as early as late-November. This notification rolls in months before you might hear back from other colleges. In a typical application timeline, students submit applications in early winter for decisions by mid- to late spring. There are two different early application windows. Early Decision I is typically in November while Early Decision II is in December or even January. If you don’t get into your Early Decision I school, you can still apply to another school’s Early Decision II deadline. Early decision can also give you an edge when it comes to acceptance rate. In 2018, colleges with early decision had an average regular acceptance rate of 50.7%, while the early decision acceptance rate was 62.3%. Colleges appear to weigh early decision applications differently since these potential students demonstrate a strong interest in their programs.

What Are the Drawbacks of Early Decision?

If you apply to a binding arrangement like early decision, you lose the opportunity to compare financial aid packages from multiple colleges. This might also impact a college’s incentive to offer you merit-based financial aid. If you already expressed excitement and interest, why would the school need to convince you to attend by offering scholarship discounts? You might even have to accept the offer before hearing from third-party scholarship organizations, affecting your ability to accurately determine if you’ll be able to afford that dream school. You can only typically reject an early decision offer if the school’s financial aid package isn’t realistic for your financial situation or if your financial situation has changed. However, if the school truly is your first choice, you can still apply for scholarships or private student loans to help bridge the gap. Finally, if you’re going to hit early decision deadlines, you need to be very organized. Submitting applications four to six months early means you also need to have application materials ready early. It’s recommended that you leave time to take the ACT and/or SAT at least twice, in case you need to boost your score. Without planning ahead, you might find yourself up against early decision deadlines. If early decision seems like an intimidating commitment, many schools also offer early action. This option allows students to apply and receive an admission decision earlier than typical decisions. But the main difference is that the option isn’t binding.

What’s The Right Choice?

Now that we’ve answered the question, “What is early decision?” the next question is whether this option is right for you. It can be tempting to want to hear back from your dream school before the holiday break hits. However, you have to consider if you’re prepared to submit your best application at such an early date. You also have to do your research regarding financial aid. There are many choices to make when applying for college. Be sure you’re aware of what your choices mean for your college career and the loans that will help you get through those four years.

2019-11-11

Avoiding Identity Theft: Student Loans Edition

Identity theft seems like something that will never happen to you, that is, until it does. And when it hits, it can cause a lot of trouble—impacting your bank accounts, credit report, taking out loans and requiring a lot of time and effort to correct. When a thief has access to your personal information, there’s no limit to the havoc they can wreak. While charges on credit cards and unauthorized bank account withdrawals are more commonly associated with identity theft, student loan fraud can happen as well. Most people know to take necessary precautions, like shredding important documents and having facial ID or passcode set on their phone, but it seems like these steps are never enough. Identity thieves can get to your information through data breaches, stolen mail, stolen wallets, email scams, and even though your internet connection. Without altogether avoiding technology or living in a vault, how cautious do you need to be? Very cautious, as it turns out. Let’s look at how to avoid identity theft, then what to do if the theft involves unauthorized student loans.

Avoiding Student Loan Identity Theft

Use Safe Internet Connections When you Cyber Monday shop in a cafe or buy Wi-Fi at 30,000 feet, you put yourself at risk for identity theft. Public Wi-Fi connections are full of fellow internet surfers, and they don’t all have good intentions. Though convenient, public Wi-Fi may not have the proper security and encryption measures in place. When a fraudster gains access to your personal information via public Wi-Fi, it’s known as a man-in-the-middle (MITM) attack. Once they’ve gained access, thieves can spy on your internet behavior and steal usernames, passwords, credit card numbers, etc. Needless to say, it’s best to avoid anything on a public network that requires you to log into accounts or make purchases. This includes applying for colleges and student loans. Be sure you’re always working from a safe, trusted internet connection and make sure your device or computer has the latest software installed. Don’t Keep Your Social Security Card in Your Wallet At some point, you’ll likely be asked to share your Social Security number at the doctor’s office, your bank, the Department of Motor Vehicles, or even your job. And because of that, it’s tempting to keep your Social Security card in your purse or wallet for easy access, but doing so can open the door to identity theft. When your SSN lives next to your credit cards and driver’s license, you give thieves everything they need to steal your identity. Instead, keep your Social Security card with other important documents in a personal safe at your house or in a rented safe deposit box at a bank or credit union. Read more about when you should and shouldn’t give out your Social Security number. Be Weary About Who You Share Information With When applying for student loans, work directly through fafsa.gov for federal loans or through reputable financial institutions for private loans. How can you tell if a site is reputable? You should be able to easily find contact information on their website and speak to a real person when you call. Reputable websites also work through encrypted connections, helping reduce the risk of identity theft by sending your data across the internet with additional layers of protection. You can tell if a website is encrypted by its web address: “HTTP” sites are not encrypted while “HTTPS” sites are. If you do find that your identity has been used to take out unauthorized student loans, the below tips can help you get back on track. Recovering from Student Loan Identity Theft If you received a call or letter from a loan servicer warning that your account is past due, despite not having a student loan with that institution, you might be the victim of identity theft. Student loan identity theft might also be discovered during a routine credit check or by a credit monitoring service. Regardless of how you find out, once you do, here’s who to contact:

Contact the lenders that opened the accounts. Their fraud departments can freeze the accounts to prevent any further damage.
Contact the Federal Trade Commission (FTC) to complete an Identity Theft Report. This report will provide a detailed recovery plan and layout the appropriate steps. It will also pre-fill forms and letters you’ll need, saving you precious time.
Contact the police and file a police report. A police report may be needed to help clear things up with lenders, credit agencies or the Department of Education.
Contact the school where the fraudulent account was opened, notify them of your incident and ask for a letter stating that the account is closed.
Contact the three major credit reporting agencies (Equifax®, Experian®, and TransUnion®) and have them place a free fraud alert on your credit report. Doing so lets each one know to take extra precaution before approving new lines of credit. You may also consider a credit freeze, which prevents any new lines of credit from opening until you have it lifted.

Keep An Eye On Things If you haven’t signed up for a credit monitoring service, now is the time. The big three reporting agencies offer these services, as do third-party platforms like Credit Karma®. You can set up alerts to be notified of any new activity tied to your personal information. If you don’t want to sign up for a service, at least do your due diligence by checking your credit frequently. You can get your credit report at no cost every 12 months from each of the main credit bureaus (Equifax, Experian, and TransUnion). Request your report at AnnualCreditReport.com. Remember, fraudsters will stop at nothing to access your personal information, and they’re good at what they do! It’s troublesome to have any aspect of life tampered with, but especially so when it comes to student loan identity theft. It pays to know ways to help protect yourself, and if the unfortunate does happen, how to begin the rebuilding process.