Advanced topic. Unsubsidized Stafford vs prime/LIBOR private

[byronic]

It's obvious that all subsidized and institutional aid options should be maxed out immediately. However, after the 8500 max stafford sub loan and some institutional loans I qualified for, about half of my tuition still needs to be financed somehow.

Option (A) is taking out the rest in unsubsidized stafford loans at 6.8% interest, accruing while in school. Also offers deferment/forbearance options post graduation and are easily consolidated. Or Option (B) is taking out a private loan from either a large commercial bank or small mom'n'pop bank that offers loans calibrated using the LIBOR index+margin.

Let's assume that I have a decent credit history (read: perfect but short) plus a cosigner with perfect credit history. We can assume that I will qualify for the minimum margin, which seems to be 3.25% for Chase, or comparable in other banks. I'm also assuming that LIBOR index calibrated loans will be better for me than prime-rate+x loans. Am I correct?

There are many factors to consider here, and I'm looking for a pretty detailed and technical answer. I would think it's completely within the realm of possibility that over the course of the loan, the private ends up being cheaper.

Which option is better?

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[The White Coat Investor]

It's obvious that all subsidized and institutional aid options should be maxed out immediately. However, after the 8500 max stafford sub loan and some institutional loans I qualified for, about half of my tuition still needs to be financed somehow.

Option (A) is taking out the rest in unsubsidized stafford loans at 6.8% interest, accruing while in school. Also offers deferment/forbearance options post graduation and are easily consolidated. Or Option (B) is taking out a private loan from either a large commercial bank or small mom'n'pop bank that offers loans calibrated using the LIBOR index+margin.

Let's assume that I have a decent credit history (read: perfect but short) plus a cosigner with perfect credit history. We can assume that I will qualify for the minimum margin, which seems to be 3.25% for Chase, or comparable in other banks. I'm also assuming that LIBOR index calibrated loans will be better for me than prime-rate+x loans. Am I correct?

There are many factors to consider here, and I'm looking for a pretty detailed and technical answer. Please avoid cliches like MAX OUT ALL FEDERAL ITS THE RULE or AVOID PRIVATE AT ALL COSTS. It's completely within the realm of possibility that over the course of the loan, the private ends up being cheaper.

Which option is better?

If you're asking whether a fixed rate or an adjustable rate will be better it is impossible to say without a crystal ball that will predict future interest rates. I don't think there is a fixed difference between LIBOR and prime either. I might look at the historical rates and compare the two loans, then make a decision assuming the future will look like the past, but that's a dicy proposition.

The good news is that when two options are similar enough that it is hard to tell which will be better, it probably doesn't matter much. You might also consider splitting the difference.

 

[byronic]

Yeah, there isn't a fixed difference between LIBOR and prime, but it seems like LIBOR might end up being marginally better.

However, it seems that in terms of LIBOR vs unsubsidized loans, the difference is clear. What I'm wondering is are there any fees associated with these private loans I'm not seeing?

Even if that 3.5% total interest rises to say lets say 7%, wouldn't you still be ahead since you spent 2-3 years at such a low interest rate?

And you are definitely right, it is impossible to predict. But looking at the cyclic nature, it just seems like the average interest % would be lower for a variable rate than the fixed 6.8%. (So for instance, over the next ten years, I would guess the average interest rate would be maybe 5% vs the 6.8%) But is there a factor I'm missing here? And what about the advantages of consolidation?

EDIT: What do you mean by splitting the difference?

 

[dpmd]

You may end up with a lower interest rate for an unspecified amount of time, but there are a few big issues to consider. The huge one is that most people aren't able to make the standard repayment for their loans during residency (ignoring the possibility of not completing school or getting a residency). A private lender isn't going to just let you pay what you can, or delay payments entirely. Other issues-you don't know what will happen with rates and could end up with a payment you can't afford later on, some lenders may want you to start paying immediately, some lenders advertise one rate but charge a higher one once you are out of school (would be in the paperwork but not everyone pays close attention to stuff like that).

 

[byronic]

That's a really good point - plus I wouldn't be able to take advantage of things like IBR. Overall, it seems like while you might end up saving money on the private loan plan, successfully making these payments is probably much more difficult and hard on your yearly budgets as well.

At this point, I think I'm leaning towards the unsubsidized route, simply due to the ease of the process, as well as the lower monthly payments if I decide to do IBR. Forbearance is also a costly but plausible option in times of need. However, I'm not completely decided.

I need ~20k/year on top of the federal route so about 80k post graduation is what id be looking at.

 

[The White Coat Investor]

Yeah, there isn't a fixed difference between LIBOR and prime, but it seems like LIBOR might end up being marginally better.

However, it seems that in terms of LIBOR vs unsubsidized loans, the difference is clear. What I'm wondering is are there any fees associated with these private loans I'm not seeing?

Even if that 3.5% total interest rises to say lets say 7%, wouldn't you still be ahead since you spent 2-3 years at such a low interest rate?

And you are definitely right, it is impossible to predict. But looking at the cyclic nature, it just seems like the average interest % would be lower for a variable rate than the fixed 6.8%. (So for instance, over the next ten years, I would guess the average interest rate would be maybe 5% vs the 6.8%) But is there a factor I'm missing here? And what about the advantages of consolidation?

EDIT: What do you mean by splitting the difference?

Split the difference- get some loans of one type and some of the other.

 

[byronic]

Why would I get some unsubsidized and some private loans if one is better than the other? I'm not following your logic.

 

[TAWS]

Why would I get some unsubsidized and some private loans if one is better than the other? I'm not following your logic.

If you plan on paying your loans back early, go with private loans because the prime rate will be low in the foreseeable future and you do not have to pay any origination fees.

If you plan on paying back your loans with minimum payments, go with federal loans because they can be discharged after 25 years on the income based repayment plan.

Keep in mind that every time you apply for a loan, you are getting a hard pull on your credit, which will reduce your credit score. I wouldn't apply for a loan unless you will go through with it.

 

[The White Coat Investor]

Why would I get some unsubsidized and some private loans if one is better than the other? I'm not following your logic.

Because you don't know which is better. Reduces regret. You only screwed up with half your loans.