18 Oct 2016

Pros and Cons of Federal and Private Loans

Pros and Cons of Federal and Private Loans

$160,000: that’s the median anticipated debt load for students currently pursuing a Doctor of Psychology degree.[1] And while PsyDs are often the most indebted psychologists, many other graduate psych students and early career psychologists face similar burdens. This means it pays to be smart when making decisions about student loans.

When picking a loan provider, or deciding whether to consolidate or refinance existing debt, your first and most important choice will be to choose between loans offered by the federal government and those offered by private financial institutions. There are advantages and disadvantages to each, with significant variations in payments; interest rates; and forbearance, deferral, and forgiveness options.

Though the details will vary depending on your particular circumstances, here’s a summary of the major pros and cons:[2]

Federal Loans


+ Protection during difficult times. To accommodate temporary hardships like unemployment, federal loans offer deferral and forbearance options that allow you to pay less, or postpone payment, for a certain time period.

+ Loan forgiveness for public service. If you work for an employer that provides a public service, such as the federal, state, or local government or a nonprofit organization, you may be eligible to have your debt forgiven after 10 years of payments. This could be an important long-term consideration when sourcing your loans.

+ Available even with limited credit. Students may not have sufficient credit to qualify for private loans offering desirable terms. Payment amounts and eligibility for federal loans are based on other factors, such as income, debt burden and family size.


- Fewer lender and loan options. While a variety of federal loans are available, the private sector features a wider range of loans, lenders and payment plans. A savvy borrower with the right qualifications may find a better match for their particular situation in the private loan market.

- Cannot take advantage of good credit. Most federal loans do not take your credit into account – even when it’s good. That means if you have a strong credit history, you may qualify for a lower interest private loan, reducing the overall amount you pay.

- Fixed repayment periods. Many federal repayment and loan forgiveness plans, such as an income-based plan, last for a fixed period. If you select these, you may be making payments for a very long time – as much as 25 years.

Private Loans

+ Good credit, lower interest rate. If you have stable employment, regular income and good credit, a private loan may offer you the lowest interest rate available. Check with your current lending institution, along with a few competitors, to find the most satisfactory terms.

+ Greater selection of lenders and products. In the crowded private loan market, you can find loans that vary widely in fixed and variable interest rates, payment periods and servicers. Comparing quotes for several different options can help you to navigate these choices and find the best loans for your needs.

+ Exploring nontraditional lenders. A growing number of lenders offer favorable loans based on alternative eligibility requirements, such as a high income or certain professional degrees. If you think you may qualify, consider loans from companies like Sofi and CommonBond.


- No loan forgiveness. Make sure you’re fully informed before selecting or refinancing with a private loan. You will no longer be eligible for federal loan forgiveness plans, such as the Public Service Loan Forgiveness program, which may be your best option in the long term if you are considering a career in public service.

- Limited deferment and forbearance options. With a private loan, you will not have access to federal forbearance and deferment. Even if you are unemployed or pursuing further education, you may have to continue paying your private loans, or risk penalties.

- Often have higher interest rates. Depending on your credit rating, your interest rate with a private loan may be higher than with a federal option. Additionally, variable rate loans may start with low interest, but eventually spike to far higher rates.

Your loan decisions can affect you for up to 30 years or longer. Before choosing, consider all available information, on topics like federal student loans, private student loans, and loan forgiveness programs. You can also check with individual lenders for the details of their specific offerings. Always keep in mind the trade-offs of each, as well as the nuances of your particular situation.

[1] Winerman, Lea. “The debt trap.” American Psychological Association. 2016. Available at: http://www.apa.org/monitor/2016/04/cover-debt-trap.aspx

[2] This information comes from the APA Student Debt Webinar, July 11, 2016. You can listen to the webinar recording and view the presentations here.

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