Private Loan vs Government Loan Which Should I Get?

[Jlaw]

Here is my situation, I start school in the fall. I have no debt and very good credit. My bank is willing to lend to me at a 3.5-4% APR (variable) and there are some things I can do to make that rate even lower. I also have a willing cosigner.

I do not plan on being in debt for a long time as I expect to receive some funds as a result of an inheritance and I will use that to pay down my debt. Even in the worst case scenario I would have my loans paid off within 5 years of graduation.

Is there any reason to even consider applying for a government loan with double to APR?

Any info/experiences would be appreciated as I'm just starting to really research this stuff.

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[MT Headed]

One commonly overlooked caveat is that government loans come with death / disability insurance. While the likelihood of death or disability is extremely low, be sure that you and your cosigner are comfortable with the risks and consequences if you go the private loan route. You might be able to purchase insurance for this outcome.

 

[Jlaw]

One commonly overlooked caveat is that government loans come with death / disability insurance. While the likelihood of death or disability is extremely low, be sure that you and your cosigner are comfortable with the risks and consequences if you go the private loan route. You might be able to purchase insurance for this outcome.

Yeah I'm aware of that but since I plan to pay the loan in full within a few years I think it makes it even less likely. If I was going to carry the debt for 20 years then yeah there is a greater chance of something happening. Insurance is a good idea though, I could probably get a life insurance policy or something until they are paid off.

 

[JacobMcCandles]

I'd take the federal loans until you have the inheritance money in hand. If you take private loans and you don't end up getting the inheritance you think you are, you're going to be in a world of hurt when they expect you to start paying them back.

 

[Jlaw]

I'd take the federal loans until you have the inheritance money in hand. If you take private loans and you don't end up getting the inheritance you think you are, you're going to be in a world of hurt when they expect you to start paying them back.

Jacob could you elaborate on this? I'm going to meet with the loan person next week to get all the details and fine print but at first pass the gvt and private loans appear to be essentially equal except that the gvt loans allow for forgiveness due to death/disability and have higher fees and APR. The private loans make no concession for death/disability but do have a clause where the co-signer can be released after 36 months of on time payments, they have lower fees, the APR is about half of what I would pay to the govt, and some have a graduation bonus where they will reduce the principle amount by several percent upon succesful completion of the degree.

Even if I took 20 years to pay the loans off the private still seems like a better deal. There is the variable vs fixed rate issue but with the rates at a record low and the economy still on shaky ground I don't think any major rate increases are in the books for the next few years. Even if they do start increasing rates my fixed rates would have to soar well beyond the rate of the government loan to offset the money I had already saved with the initial lower rate.

Sorry for all the questions but I'm a finance major and just cannot reconcile how the gvt loan is a better deal than the private at this point, though it seems that most people opt for the government loan.

 

[JacobMcCandles]

Jacob could you elaborate on this? I'm going to meet with the loan person next week to get all the details and fine print but at first pass the gvt and private loans appear to be essentially equal except that the gvt loans allow for forgiveness due to death/disability and have higher fees and APR. The private loans make no concession for death/disability but do have a clause where the co-signer can be released after 36 months of on time payments, they have lower fees, the APR is about half of what I would pay to the govt, and some have a graduation bonus where they will reduce the principle amount by several percent upon succesful completion of the degree.

Even if I took 20 years to pay the loans off the private still seems like a better deal. There is the variable vs fixed rate issue but with the rates at a record low and the economy still on shaky ground I don't think any major rate increases are in the books for the next few years. Even if they do start increasing rates my fixed rates would have to soar well beyond the rate of the government loan to offset the money I had already saved with the initial lower rate.

Sorry for all the questions but I'm a finance major and just cannot reconcile how the gvt loan is a better deal than the private at this point, though it seems that most people opt for the government loan.

To preface this a bit. Most opt for the government loan because private loans aren't available to them at interest rates better than the 6.8%. Finding a private loan for under that is rare because you don't have anything to back up loan with since they can't take your asset, knowledge, from you. That's also why they want a co-signer, so they can go after them if something happens.

To answer your question, government loans offer another program that private loans do not: income based repayment (IBR). This program calculates how much you pay towards your loans based off of your income. Here's a scenario. Let's say you graduate medical school with $200,000 in debt, you're single, and you start residency (minimum of 3 years) making $50,000. Under IBR, you'll have to pay ~$400/mo. That's doable. Under the private loan that doesn't offer an IBR plan, you'll have to start repaying the loan immediately upon graduation. If you are repaying the private loan ($200,000, 4%, 10 years), your payment will be $2025. Even if you do a 20 year repayment, you're still looking at $1200. You can't make those kinds of payments as a resident and still get by so you'll end up in deep trouble.

If it were me, I'd take the federal loans out (even though the may be a few interest points higher than what your bank will give you) and then repay those loans when you get the inheritance, depending on how much it is but that's a completely different financial situation.

 

[Jlaw]

Thanks alot Jacob, you definitely gave me some things to think about, I'll bring this up next week when I meet with the loan people and will factor it into my final decision.

The finance guy in me is just perplexed at this whole system, why even require a payment during residency, if you are paying 400 a month and 7% interest you're barely even covering a third of the interest you're accruing each month and you principal is still increasing year over year. The real money seems to be in making med school loans not being a physician haha.

Anyway thanks for the help, very much appreciated.

 

[JacobMcCandles]

Thanks alot Jacob, you definitely gave me some things to think about, I'll bring this up next week when I meet with the loan people and will factor it into my final decision.

The finance guy in me is just perplexed at this whole system, why even require a payment during residency, if you are paying 400 a month and 7% interest you're barely even covering a third of the interest you're accruing each month and you principal is still increasing year over year. The real money seems to be in making med school loans not being a physician haha.

Anyway thanks for the help, very much appreciated.

Don't forget that with federal loans you can also go into forbearance which means you won't have to make any payments but your accrued interest will automatically get capitalized. Paying on your loans during residency is a fantastic idea as it's a guaranteed 6.8% return. You won't find a better guaranteed return elsewhere right now.

 

[furyhecla]

@Jlaw So what did you decide? Did you go private or federal?

Your questions were exactly what we were thinking. The private loans seem like a better deal.

My husband and I are also thinking about going private, because we have good credit and can get lower than 6.8%. Also, we will only be taking out loans for fees (my husband will continue to work).

I am not that worried about death/disability issues, or even the issues re: forbearance, mainly because we will be taking out about 1/2 the usual amount, and both my husband and I will be working.

The only thing that bothers me a bit, is I will most likely work in under-served areas, where one can get loan repayment. Can private loans be repaid by these loan forgiveness programs?

The other thing to think about is, is that one doesn't have to decide now what to do for 4 years. Every year you can change what loans you take out).

These are the ones I am looking at:

https://www.discover.com/student-loans/private-student-loans/health-professions-loans.html (has 2% graduation bonus)

https://www.studentloan.com/privatestudentloans/citiassisthealthprofessionsloans.htm (allows for forbearance in residency)

https://www.usaa.com/inet/pages/bank_student_loan_main (repayment can begin 60 months after graduation if you want)

 

[Jlaw]

@Jlaw So what did you decide? Did you go private or federal?

I went private. I got approved for a loan @ 3.7% with Chase which is my bank, no fees, no dispersal charges, everything deferred until graduation. For me it is the better decision. I plan to basically pay it off year to year so the main thing for me is avoding dispersal fees and interest rates so high that I cringe to borrow for even a year at a time.

I don't know about loan repayment but would guess it applies to any loan, why would they not pay off a private loan, its cheaper than government! And yes your are right, you need to reapply every year, so you can always switch to a different source.

You sound like a prime candidate for a private loan though. My advice is go private. Be advised that some companies do offer private loans with income based repayment and death/disability forgiveness while also offering the private loan terms.

I actually talked to my bank today and they told me that the possible changes to the student loan format could push medical school loans up to 9% or higher. Not sure if this is factual but if it is its going to be a game changer.

 

[Caprica6]

The only thing that bothers me a bit, is I will most likely work in under-served areas, where one can get loan repayment. Can private loans be repaid by these loan forgiveness programs?

Public service loan forgiveness is only available for federal loans

 

[Jlaw]

Public service loan forgiveness is only available for federal loans

I wasn't aware of that, but remember to look into the terms. Some loan forgiveness programs don't actually assume your debt until like 10 years after graduation, by which point you will already have paid off a significant portion, and might have even paid it all off if, like you said, your husband is working and you plan to pay some tuition up front or repay the loan early. In that case you might end up just paying alot more interest for no reason.

Just another thing to think about. Some hospitals offer signing bonuses, etc basically to give you the funds to pay off the loan when you sign on to be an attending for the first time.

Anyway keep your options open and explore them all. A government loan will cost you around 7% while a private will cost half of that, so the best investment you can make is to pay off either loan ASAP and start putting your salary in the bank.

 

[Caprica6]

Is anyone worried about the variable APR? How likely would it be for this to increase dramatically?

 

[Jlaw]

Is anyone worried about the variable APR? How likely would it be for this to increase dramatically?

Unlikely in the next few years at least. The fed uses interest rates to control the economy, low rates mean cheap money and spur growth, high rates make money more expensive to obtain and cause people to hold cash in order to earn interest, which stifles growth. We are obviously still in a period of financial crisis, plus the government has record amounts of debt and will eventually need to raise taxes to pay this off.

Keep in mind also you are saving money until the rate climbs above 6.8%, so let say that in 10 years this happens, you will already have been paying it off for 5 years and you will be an attending with an attendings salary....just pay it off. If you can't afford to do so right away it will still take a number of years to compound to the point where the private loan becomes more expensive than the government loan.

 

[furyhecla]

We ultimately chose to go with a 3.25% private loan (Health Professions loan from Discover), and not take the 6.8% unsubsidized federal loan. Ours is not a fixed rate, but it is tied to the prime interest rate. Which is likely to remain low for sometime. I will re-assess after each year of medical school. We are lucky to have good credit, and my husband is co-signing. So I understand that most traditional students wouldn't have this option, but it is the best option for us.

Although this won't qualify for pay back by the national public service forgiveness program, other programs (for instance the National health corp forgiveness program) do pay back private loans, as long as they are actual education loans.

 

[Optomchick]

We ultimately chose to go with a 3.25% private loan (Health Professions loan from Discover), and not take the 6.8% unsubsidized federal loan. Ours is not a fixed rate, but it is tied to the prime interest rate. Which is likely to remain low for sometime. I will re-assess after each year of medical school. We are lucky to have good credit, and my husband is co-signing. So I understand that most traditional students wouldn't have this option, but it is the best option for us.

Although this won't qualify for pay back by the national public service forgiveness program, other programs (for instance the National health corp forgiveness program) do pay back private loans, as long as they are actual education loans.

Can you tell me more about this loan or other private loans? My mom has Citibank so I don't know if I could get a loan from Discover. Maybe the Citi Student loan? My school has only offered me 6.8% unsub interest loan, and although my parents are low income, they do not give out the lower interest loans to Optometry students.

I'm considering taking a private loan because my mom has very good credit and is willing to cosign. Which is the best one I should get?
PLEASE HELP :/

 

[SnakeOil]

I went through the same process recently. Landed a Discover loan at 3.5%. No origination fees, residency forbearance, graduation reward, etc. I think they offer a better deal than the govn't loans if you have good credit/can get a cosigner.

 

[Optomchick]

I went through the same process recently. Landed a Discover loan at 3.5%. No origination fees, residency forbearance, graduation reward, etc. I think they offer a better deal than the govn't loans if you have good credit/can get a cosigner.

I talked to somone at Citi about their Health Professions loan. The problem is it starts at 3.5% but changes every three months and there's no cap so theoretically it could go above 7%. Not sure what to do.

 

[Igor4sugry]

I would only get government loans. Main reason is they are fixed interest rate and more favorable repayment terms.

[1] Private loans are usually variable. The worst thing to do is get a co-signer and drag someone else into your education dept.

[2] You have little flexibility on repayment. Once you are a resident making $49k/year and your Discover/Citi loan kicks into repayment they will not care whether you can't make the monthly payments. You will be turned over to collection company, your credit history will be destroyed, you will not be able to get a mortgage or a car loan for a long time after that.

 

[Igor4sugry]

Unlikely in the next few years at least. The fed uses interest rates to control the economy, low rates mean cheap money and spur growth, high rates make money more expensive to obtain and cause people to hold cash in order to earn interest, which stifles growth. We are obviously still in a period of financial crisis, plus the government has record amounts of debt and will eventually need to raise taxes to pay this off.

Keep in mind also you are saving money until the rate climbs above 6.8%, so let say that in 10 years this happens, you will already have been paying it off for 5 years and you will be an attending with an attendings salary....just pay it off. If you can't afford to do so right away it will still take a number of years to compound to the point where the private loan becomes more expensive than the government loan.

I think you are taking quite a big risk. The prime rate was 6.5% in 2008. There is a very good chance the rate will go up in next 4 years. At this point the only direction your interest rate is going to go is up, up, up.

Also, your med school dept is probably going to be ~180k-200k. This dept with compound very fast once your variable interest rate gets adjusted up.

 

[Optomchick]

I think you are taking quite a big risk. The prime rate was 6.5% in 2008. There is a very good chance the rate will go up in next 4 years. At this point the only direction your interest rate is going to go is up, up, up.

Also, your med school dept is probably going to be ~180k-200k. This dept with compound very fast once your variable interest rate gets adjusted up.

I guess my *hope* was that by some miracle the government would bring back subsidized loans for next year so I would only take out a private loan for one year. I just think if they give me a high interest rate then I don't have to take the money, I could always go back to the high 6.8 unsub loans womp womp. I don't think my mom minds being a cosigner. Also I'm an optometry student, so I dont have to worry about debt interest increasing during "residency" since I'm not doing one.

This is the one I was looking at:
https://www.studentloan.com/privatestudentloans/citiassisthealthprofessionsloans.htm

"Generous Repayment Terms

• Take up to 25 years to repay, with a 9-month grace period, plus any periods of deferment or forbearance.
• You can choose to pay interest while in school.
• There's never a penalty for paying early or prepaying."

 

[Optomchick]

Also if I decide to take out the unsub federal loans, how much should I take out? My school costs $32,000 each year and there's a 1.5% origination fee...I'm thinking I'll plead with my parents to pay for my rent/food/supplies to limit the loan, but I'm not sure if it make a big difference...I was offered $43,000 unsub loan, should I take out the whole amount or maybe $35,000?

 

[PetMySausage]

I've always heard, go with government loans first if at all possible, then private loans if you have no other options.

 

[Jlaw]

I think you are taking quite a big risk. The prime rate was 6.5% in 2008. There is a very good chance the rate will go up in next 4 years. At this point the only direction your interest rate is going to go is up, up, up.

Also, your med school dept is probably going to be ~180k-200k. This dept with compound very fast once your variable interest rate gets adjusted up.

Yes at the end of an unprecedented period of economic growth. The economy is in shambles at the moment and our government is in a record high state of indebtedness so I find it hard to believe that they would decide to crank up interest rates.

Anyway my situation isn't common because I am using the loans more as a bridge than anything, I have no intention of waiting 25 years, or even 5, for that matter, to pay them in full.

 

[linebacker57]

Believe it or not, this kind of borrowing is absolutely going to tank your credit score, i mean not as much as defaulting on a loan, but still, it will certainly make the APR on your next loan significantly higher than if you had not done this. This is because banks dont make money off people who pay their principle off quickly. So even if you can pay off the loan quickly, it may be in your best intrest to reconsider your repayment strategy, as this could certainly cost you alot of money when its time to buy a house

 

[MT Headed]

Believe it or not, this kind of borrowing is absolutely going to tank your credit score, i mean not as much as defaulting on a loan, but still, it will certainly make the APR on your next loan significantly higher than if you had not done this. This is because banks dont make money off people who pay their principle off quickly. So even if you can pay off the loan quickly, it may be in your best intrest to reconsider your repayment strategy, as this could certainly cost you alot of money when its time to buy a house

I choose not to believe it, and the top 150 google hits on the topic (I quit looking after that) disagree with you too.