Private Loans vs. Federal Loans

[greentealeaves]

Has anyone ever actually found private loans to be favorable compared to federal loans? If so, which bank or financial entity issued these private loans?

---

Members don't see this ad.

 

[lalalallala]

I know people who have taken lines of credit out on their parent's houses and then have gotten a life insurance policy for the amount of the loan. The interest rates are incredibly low. But it definitely requires a more thorough check into your plan and all. Federal loans seem to be what the vast majority of people are going with but the interest rates and fees are atrocious.

 

[lalalallala]

To clarify: if your parents have 400k paid into their home's value then you may be able to get a loan on the house for the 200k you need for med school at a low interest rate. If you were to die then your parents would be on the hook for that 200k without your income to pay it back. Therefore they need a 200k life insurance policy out on you so if you were to die they would get that 200k back.

 

[medschoolzombie]

Has anyone ever actually found private loans to be favorable compared to federal loans? If so, which bank or financial entity issued these private loans?

I am in the same situation as you. I spent the last week researching this and crunching numbers. Short answer is yes and no. Private loans will likely have a lower interest rate in comparison to loans like grad plus (assuming you have great credit) which means you’ll be in less debt overall. Sad news is a lot of private loans will not offer income based repayment plans like federal ones will so depending on how much you take out and how much family help you get, you may be screwed if you try to pay them off in residency (not all lenders will let you defer them until after residency)

I am looking at taking out around 40-50k in private/grad plus. Assuming I got a lower interest rate of 5ish, I’d be saving close to 30k in the long run. However, the govt offers PAYE/REPAYE programs which most people use to start repaying loans on residency. My overall projected debt at the end of 4 years is 430k. Under a REPAYE plan, the govt would pay half the interest which means in residency my loans would be growing at a 3.5% interest and I’d be paying $300 a month. If I have private loans, refinance them, and start paying them off, I’d Be paying ~2k a month on them which I doubt the average resident can afford

 

[Mike Bagwell]

A private student loan is the absolute dumbest financial decision anyone can make.

Private student loans have ZERO flexibility in repayment terms. They are only discharged, should it ever come to that, when you die. That private student loans will be a ball and chain till it is paid off. Federal loans have various repayment plans and forgiveness programs.

If you are thinking of private student loans for school, then you cannot afford school.

As an independent student, you will get enough federal loans to cover undergrad and then federal loans for graduate school so if you pick the right schools, you will never need a private loan.

Seriously, private student loans are the dumbest financial blunder you can possibly make because the decision is for life.

 

[medschoolzombie]

A private student loan is the absolute dumbest financial decision anyone can make.

Private student loans have ZERO flexibility in repayment terms. They are only discharged, should it ever come to that, when you die. That private student loans will be a ball and chain till it is paid off. Federal loans have various repayment plans and forgiveness programs.

If you are thinking of private student loans for school, then you cannot afford school.

As an independent student, you will get enough federal loans to cover undergrad and then federal loans for graduate school so if you pick the right schools, you will never need a private loan.

Seriously, private student loans are the dumbest financial blunder you can possibly make because the decision is for life.

Most people who take private loans defer them until they can get a salary. The federal interest rate is trash compared to what someone with great credit can get via a private loan. It's enough to save you around 40k in the long run

 

[907914]

Most people who take private loans defer them until they can get a salary. The federal interest rate is trash compared to what someone with great credit can get via a private loan. It's enough to save you around 40k in the long run

Say someone has a credit score of 81X, will that get a low enough interest rate to defer until salary and save in the long run?

 

[Mike Bagwell]

Most people who take private loans defer them until they can get a salary. The federal interest rate is trash compared to what someone with great credit can get via a private loan. It's enough to save you around 40k in the long run

I should have been more specific.

If you take out a private loan for $5000 to cover the difference in costs, then that is a non-issue because $5000 is a non-issue.

If you are funding your ENTIRE or close to ENTIRE education with private loans, you are essentially digging your own grave and should you not get a job that allows you to pay back the loans, which have ZERO flexibility in repayment terms, then you will fall into that grave that you just dug with the loan servicer waiting with the backhoe.

The idea here is it depends on how much money you are taking out in private loans. Most people are not taking out $5000. Some have $100000 or more which is mind boggling.

If you were to take out 500000 in federal loans and you ended up in an IBR plan for 20 years because you did not enter a career that paid you enough to make the minimum payments, the government will forgive the remaining balance. That security would be greater than $40000 on a $500000 balance.

Private educational loans are legalized loan sharking.

 

[medschoolzombie]

Say someone has a credit score of 81X, will that get a low enough interest rate to defer until salary and save in the long run?

Ya cause you’re in the top bracket of credit earners. You’ll accumulate less interest in the first place and then you can refinance it for an even lower interest rate post graduation.

 

[medschoolzombie]

I should have been more specific.

If you take out a private loan for $5000 to cover the difference in costs, then that is a non-issue because $5000 is a non-issue.

If you are funding your ENTIRE or close to ENTIRE education with private loans, you are essentially digging your own grave and should you not get a job that allows you to pay back the loans, which have ZERO flexibility in repayment terms, then you will fall into that grave that you just dug with the loan servicer waiting with the backhoe.

The idea here is it depends on how much money you are taking out in private loans. Most people are not taking out $5000. Some have $100000 or more which is mind boggling.

If you were to take out 500000 in federal loans and you ended up in an IBR plan for 20 years because you did not enter a career that paid you enough to make the minimum payments, the government will forgive the remaining balance. That security would be greater than $40000 on a $500000 balance.

Private educational loans are legalized loan sharking.

I think it depends.
In my case, I’m trying to fund about half (50k). Since I have a great credit score I’m very certain I’ll get an interest rate that’s less than the grad plus one (~8). Because of this, I’ll end up accumulating less interest in school so my total loan value will be a lot less than what it would be had I taken out a grad plus. During residency, I would probably do repaye for my federal loans and refinance my private ones for a lower rate and defer them until I get out of residency. Afterwards I’ll have enough money as an attending to pay them off along with my federal ones if I don’t overspend for a few years

Even if you’re a physician who’s on the bottom end of the salary spectrum, youre still rich enough to be able to pay them off in time. Plus you can still refinance your loans to get more time to pay them off if needed.

I think this method is really a drawback for people who want to do PSLF type programs or want to be in debt for that long. I personally don’t like the idea of prolonging student loan debt when I have the option to pay it off faster.

The chance of you failing out of med school is pretty rare. The chance of you not matching somewhere as a US md/do is also rare. This would be a terrible idea for a Caribbean grad for example

 

[Mike Bagwell]

I think it depends.
In my case, I’m trying to fund about half (50k). Since I have a great credit score I’m very certain I’ll get an interest rate that’s less than the grad plus one (~8). Because of this, I’ll end up accumulating less interest in school so my total loan value will be a lot less than what it would be had I taken out a grad plus. During residency, I would probably do repaye for my federal loans and refinance my private ones for a lower rate and defer them until I get out of residency. Afterwards I’ll have enough money as an attending to pay them off along with my federal ones if I don’t overspend for a few years

Even if you’re a physician who’s on the bottom end of the salary spectrum, youre still rich enough to be able to pay them off in time. Plus you can still refinance your loans to get more time to pay them off if needed.

I think this method is really a drawback for people who want to do PSLF type programs or want to be in debt for that long. I personally don’t like the idea of prolonging student loan debt when I have the option to pay it off faster.

The chance of you failing out of med school is pretty rare. The chance of you not matching somewhere as a US md/do is also rare. This would be a terrible idea for a Caribbean grad for example

Do it at your own risk. You essentially forfeit any rights you have when you take on private student loans. Those loan servicers will screw you over at any step of your relationship with them.

Hasan Minhaj interestingly has a great new episode on this issue on his Netflix show Patriot Act. I suggest you give it a view.

 

[medschoolzombie]

Do it at your own risk. You essentially forfeit any rights you have when you take on private student loans. Those loan servicers will screw you over at any step of your relationship with them.

Hasan Minhaj interestingly has a great new episode on this issue on his Netflix show Patriot Act. I suggest you give it a view.

I watched that episode and honestly it made me lose faith in the govt lol. The whole episode was about how the DoE is screwing over students by servicing their loans through shady providers. Doesn’t exactly inspire confidence in government loans, especially for people who’re interested in PSLF. The govts loan servicers are apparently even more likely to screw you

 

[Mike Bagwell]

I watched that episode and honestly it made me lose faith in the govt lol. The whole episode was about how the DoE is screwing over students by servicing their loans through shady providers. Doesn’t exactly inspire confidence in government loans, especially for people who’re interested in PSLF. The govts loan servicers are apparently even more likely to screw you

I think you're missing the point. The government loans have a lot of leeway that is in writing. A private student loan does not have that. The terms are very strict. Of course that's not an issue if you pay the loan off according to those terms but I'm assuming we are talking about loans in the six figure range. If you lose your job and you have a six figure private loan, you are SOL.

 

[medschoolzombie]

I think you're missing the point. The government loans have a lot of leeway that is in writing. A private student loan does not have that. The terms are very strict. Of course that's not an issue if you pay the loan off according to those terms but I'm assuming we are talking about loans in the six figure range. If you lose your job and you have a six figure private loan, you are SOL.

I get what you’re saying but many Private ones offer similar leeway’s. You sign a contract all the same with private lenders. The main difference is in repayment plans from what I’ve found. The chances of you losing your job in the medical field seems really low in comparison to other fields

 

[Mike Bagwell]

I get what you’re saying but many Private ones offer similar leeway’s. You sign a contract all the same with private lenders. The main difference is in repayment plans from what I’ve found. The chances of you losing your job in the medical field seems really low in comparison to other fields

Go ahead and explain then.

 

[RangerBob]

I had some private loans going into med school.

Do not, under any circumstance, take private loans for med school. Federal loan rates aren’t *that much worse, and their effective rate is almost cut in half with the REPAYE subsidy. That makes your rates effectively quite low during residency. And you get all the benefits of federal loans.

If you do not graduate med school, federal loans at least give you the option for IBR/REPAYE for 25 years and then forgiveness (likely followed by bankruptcy if you get hit by the tax bomb that is still in place). But if you get a job as a janitor at a non-profit? All loans forgiven in 10 years.

If you get a great job you can consolidate your federal loans with a private one. I did the match-it’s not with it for my wife and I right now given how much of a subsidy we get from REPAYE. Consolidating would lower our rate a little amount, but we lose all protections/flexibility that federal loans come with it. Definitely not worth the 0.25-1.0% interest rate difference.

Just my opinion. But I’d recommend avoiding private lenders (aside from family, HELOC) like the plague until at least residency, at which point it’s worth looking into you own personal situation to see what ma work best

 

[Mike Bagwell]

I had some private loans going into med school.

Do not, under any circumstance, take private loans for med school. Federal loan rates aren’t *that much worse, and their effective rate is almost cut in half with the REPAYE subsidy. That makes your rates effectively quite low during residency. And you get all the benefits of federal loans.

If you do not graduate med school, federal loans at least give you the option for IBR/REPAYE for 25 years and then forgiveness (likely followed by bankruptcy if you get hit by the tax bomb that is still in place). But if you get a job as a janitor at a non-profit? All loans forgiven in 10 years.

If you get a great job you can consolidate your federal loans with a private one. I did the match-it’s not with it for my wife and I right now given how much of a subsidy we get from REPAYE. Consolidating would lower our rate a little amount, but we lose all protections/flexibility that federal loans come with it. Definitely not worth the 0.25-1.0% interest rate difference.

Just my opinion. But I’d recommend avoiding private lenders (aside from family, HELOC) like the plague until at least residency, at which point it’s worth looking into you own personal situation to see what ma work best

I'm still waiting for that other user to show me the "leeway's" of private student loans because I sure as hell want to know.

 

[medschoolzombie]

I'm still waiting for that other user to show me the "leeway's" of private student loans because I sure as hell want to know.

My bad I thought I responded

Assuming you have good credit, the first benefit is being able to refinance for a lower rate. If you look at top lenders like Sofi, Lendkey etc their rates are as low as 2/3% which is about/a little less than what the govt woudl offer even with repaye

These companies will also allow you to do an IBR type repayment plan but it’s more fixed. For example, Sofi will let you pay a flat $100 per month throughout your residency. From what I got plugging values into the Fedloans calculator, my monthly payment through either PAYE/repaye would be $320. In that way I’m technically saying money in the present. Another refinanced caps it at $25/ month. When you’re not making much money during residency those extra 100-200 can be very helpful

 

[RangerBob]

My bad I thought I responded

Assuming you have good credit, the first benefit is being able to refinance for a lower rate. If you look at top lenders like Sofi, Lendkey etc their rates are as low as 2/3% which is about/a little less than what the govt woudl offer even with repaye

These companies will also allow you to do an IBR type repayment plan but it’s more fixed. For example, Sofi will let you pay a flat $100 per month throughout your residency. From what I got plugging values into the Fedloans calculator, my monthly payment through either PAYE/repaye would be $320. In that way I’m technically saying money in the present. Another refinanced caps it at $25/ month. When you’re not making much money during residency those extra 100-200 can be very helpful

Keep in mind those rates are typically the 5-yr variable rate. Most people don't go for that unless they're expecting to pay their loans off within 1-2 years.

I have a credit score above 800 and attending salary. My 5-yr loan was quoted at a fixed rate of 3.65% (4.5% for 10-year), and a 5-yr variable rate would be 2.54%. The rates are lower when consolidating more. The rates I got quoted were for 190k (my wife's share, since her loans won't be eligible for PSLF ever, whereas mine still possibly could be, and I have 4yrs credit). For 100k, the rates go up about an entire 1%.

One thing to remember is as long as you re-certify on-time, your interest with federal loans never capitalizes. That means that $10-20k/year you accrue is actually at 0%. And because you can selectively pay off specific loans, you can use that to your benefit. Plus, if you consolidate your loans with a private lender, all your interest effectively capitalizes (note, it does that anyway when you start repayment, so if you consolidate your loans upon graduate then there's no difference there)

Remember, federal loans will let you put your loans into forbearance at any time no questions asked. Your interest would capitalize, which sucks, but that's a great benefit should you ever lose your job, run into huge medical expenses, etc. (Of course, if you lose your job, the smartest thing to do is re-apply for REPAYE, but that hardship forbearance is immediate).

In my opinion, with the advent of REPAYE and the possibility of PSLF, private loans are a hard sell. I just don't personally think the rates are good enough to justify losing all the benefits of federal loans.

The less you owe/more you make the bigger difference you'll see in the interest rates, of course. But then, they also matter a bit less because you're accruing less overall and/or have the money to afford paying things off quick enough that the rate difference has less impact.

You may save a couple hundred per month during residency with the private loans, but honestly all residents except possibly a few in NYC/SF with families can afford that. But then you lose the benefits for the 5-25 years after residency, depending on how long you need to repay your loans.

I know plenty of people who believe the private consolidation loans are worth it. I am not one of them. I encourage anyone looking into taking out private loans/consolidating their federal loans into a private one to just very carefully think about their situation.

 

[lalalallala]

Keep in mind those rates are typically the 5-yr variable rate. Most people don't go for that unless they're expecting to pay their loans off within 1-2 years.

I have a credit score above 800 and attending salary. My 5-yr loan was quoted at a fixed rate of 3.65% (4.5% for 10-year), and a 5-yr variable rate would be 2.54%. The rates are lower when consolidating more. The rates I got quoted were for 190k (my wife's share, since her loans won't be eligible for PSLF ever, whereas mine still possibly could be, and I have 4yrs credit). For 100k, the rates go up about an entire 1%.

One thing to remember is as long as you re-certify on-time, your interest with federal loans never capitalizes. That means that $10-20k/year you accrue is actually at 0%. And because you can selectively pay off specific loans, you can use that to your benefit. Plus, if you consolidate your loans with a private lender, all your interest effectively capitalizes (note, it does that anyway when you start repayment, so if you consolidate your loans upon graduate then there's no difference there)

Remember, federal loans will let you put your loans into forbearance at any time no questions asked. Your interest would capitalize, which sucks, but that's a great benefit should you ever lose your job, run into huge medical expenses, etc. (Of course, if you lose your job, the smartest thing to do is re-apply for REPAYE, but that hardship forbearance is immediate).

In my opinion, with the advent of REPAYE and the possibility of PSLF, private loans are a hard sell. I just don't personally think the rates are good enough to justify losing all the benefits of federal loans.

The less you owe/more you make the bigger difference you'll see in the interest rates, of course. But then, they also matter a bit less because you're accruing less overall and/or have the money to afford paying things off quick enough that the rate difference has less impact.

You may save a couple hundred per month during residency with the private loans, but honestly all residents except possibly a few in NYC/SF with families can afford that. But then you lose the benefits for the 5-25 years after residency, depending on how long you need to repay your loans.

I know plenty of people who believe the private consolidation loans are worth it. I am not one of them. I encourage anyone looking into taking out private loans/consolidating their federal loans into a private one to just very carefully think about their situation.

How do you learn about all of these consolidation options with federal loans and this in particular: "One thing to remember is as long as you re-certify on-time, your interest with federal loans never capitalizes. That means that $10-20k/year you accrue is actually at 0%."

I am about to have to take out federal loans and this all just seems like such critical information that wasn't really obvious to me

 

[ciestar]

I had some private loans going into med school.

Do not, under any circumstance, take private loans for med school. Federal loan rates aren’t *that much worse, and their effective rate is almost cut in half with the REPAYE subsidy. That makes your rates effectively quite low during residency. And you get all the benefits of federal loans.

If you do not graduate med school, federal loans at least give you the option for IBR/REPAYE for 25 years and then forgiveness (likely followed by bankruptcy if you get hit by the tax bomb that is still in place). But if you get a job as a janitor at a non-profit? All loans forgiven in 10 years.

If you get a great job you can consolidate your federal loans with a private one. I did the match-it’s not with it for my wife and I right now given how much of a subsidy we get from REPAYE. Consolidating would lower our rate a little amount, but we lose all protections/flexibility that federal loans come with it. Definitely not worth the 0.25-1.0% interest rate difference.

Just my opinion. But I’d recommend avoiding private lenders (aside from family, HELOC) like the plague until at least residency, at which point it’s worth looking into you own personal situation to see what ma work best

My husband works in finance and absolutely agrees. Private loans to fund med school is a stupid and bad idea.

 

[RangerBob]

How do you learn about all of these consolidation options with federal loans and this in particular: "One thing to remember is as long as you re-certify on-time, your interest with federal loans never capitalizes. That means that $10-20k/year you accrue is actually at 0%."

I am about to have to take out federal loans and this all just seems like such critical information that wasn't really obvious to me

It took a lot of research. When you owe as much as my wife and I do, these things matter. I can't remember where I did the research--some was through the gov't websites, some through student loan blogs (and verifying by experience/with others), some from SDN, etc. WCI was very helpful too.

I am sure I still have plenty to learn.

 

[Mike Bagwell]

This guy advocating for private loans is giving you very specific scenarios that don't apply to the masses. First of all, if you take out a private loan, there is a very strong likelihood that Navient will be the loan servicer. Just read up on Navient to learn all you need to know about them.

Secondly, I don't know anyone who is going to be making a physician salary that would take ten years to pay their student debt off. When you start making six figures, you start paying those loans off two or three payments at a time so yearly interest figures are not a good comparison because you are paying the loans off in a fraction of the time before they reach maturity.

Having said all that, you are STILL locked into whatever terms a private lender sets and they are NOT DISCHARGEABLE in a bankruptcy should you ever become disabled and they have ZERO flexibility with your repayment terms. That is a tremendous risk to take even if you are going to become a doctor eventually. Federal loans have forgiveness and very generous IBR plans where you wouldn't have to pay the balance of your loans after a set amount of time if you ever became disabled or worse if you failed STEP1 and got that surgical prelim spot.

It's actually common financial wisdom. You do not take risks with money. I think this user needs to have a sitdown chat with Dave Ramsey because they are obviously very confused or very naive.

Private student loans are actually worse than the worst credit card you can imagine. The only thing worse than having a private student loan is having a gambling problem. Please do not post that type of financial garbage, which will be discredited by anyone with any financial knowledge, on a forum where people are expected to exercise good judgment, common sense, and ethics in their careers. If you are taking a private loan out for ANY type of schooling, YOU CANNOT AFFORD SCHOOL!