Private Loans?

[gdbath1995]

Does anyone have any experience taking private loans instead of federal loans? Pros and cons?

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[AlexMack12]

Does anyone have any experience taking private loans instead of federal loans? Pros and cons?

I have never utilized private loans, but as someone who needed federal loans for both undergrad and med school, I hope I can give you some useful information (and perhaps someone who has taken out private loans can weigh in too!)

Federal loans far and away offer the most flexibility in terms of repayment options. While they typically cannot be discharged through bankruptcy, if you fall on hard times, they have options for deferring payments or forebearance, which permits you to temporarily stop making payments until your financial situation improves. Obviously, this is not without consequence (interest continues to compound, etc) but it does permit you to avoid defaulting on your loans, which negatively impacts your credit. Private loans generally do not have such flexibility in their repayment options. Private loans also often do not have a grace period before they enter repayment, whereas federal loans do.

Federal loans are also eligible for income based repayment plans, which you will probably need while you’re in residency. Many students with loans from medical school have a very high debt-to-income ratio while in residency, and paying back loans without adjustments to the repayment amount each month that takes into account the disproportionately low income you have as a resident compared to your loan burden is quite difficult, if not impossible. Again, income based repayment plans are not without consequence- you often end up paying far more back than just the principal due to the compounding interest, etc. Still, such repayment plans do allow you to at least start repaying your loans AND avoid defaulting.

Finally, many private loans require a co-signer. For students without resources (or who may come from more resource-rich backgrounds but may not have anyone willing to serve as a co-signer), this can be a barrier that prevents them from obtaining private loans at all. Federal loans do not require a co-signer. Some require a simple credit check (PLUS loans, which fill the gap in financial need after Stafford loans (which do not require a credit check) have been used up) but by and large, they do not require the pristine credit or access to resources that most private loans offer.
In addition, federal loan rates are generally fixed, and while some private loans do have better rates on advertisements, realize that such rates are reserved for people with excellent credit, co-signers with resources/excellent credit, etc. Depending on your particular financial situation, private loan rates may actually be higher than federal loan rates.

Again, hopefully someone with experience using private loans can weigh in, but federal loans (for the time being) do have a some useful features that private loans do not.

 

[tymont12]

Does anyone have any experience taking private loans instead of federal loans? Pros and cons?

AlexMack gave a lot of good information. To summarize my take, having looked into it and only taking Federal loans:

Federal loans
+ more easily obtainable
+ eligible for payment plans (IBR, PAYE, REPAYE)
+ forgivable if you die or are disabled
± 6 month grace period, deferment
+ can be refinanced into private loans if desired for lower rate
- higher interest rate (usually) compared to private loans

Private loans
+ usually lower interest rate than Federal loans
- not eligible for payment plans
- may require cosigner
- not forgivable if you die or are disabled and cannot afford (I think you could declare bankruptcy though)

If you need the money, then you need the money but avoid private loans if you can. Take out Federal loans and if you end up wanting to pay them off rather than do an income-based repayment plan, refinance with someone like Sofi or Earnest to lower the interest rate.

 

[Taddy Mason]

The above posters nailed it. Federal >>>> private 99.9% of the time, largely due to repayment options. The one thing I will add is that, at least in my experience, many private loans do offer a grace period. Interest rate honestly isn’t that much (if any) better with private and if they are offering notably lower interest rates they’re probably variable v. fixed. The weighted interest of my federal loans is much better than my private ones. Also, be aware that interest rates are likely going to be rising...Your best bet is to take what you can federally and fill in the gaps as needed with private loans.