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Federal vs. Private Education Loans

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Both federal and private loans are viable options for financing an education, but it is important for the funding source to be one that best complements the student’s expected career path and financial goals. Medical students face a unique situation with long enrollment periods followed by additional years of post-graduation training. Therefore, careful consideration should be given when choosing financing options.

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Research and Then Decide

Each loan type has its own advantages and disadvantages.  To fully understand the value of each loan program, you should compare the specific features, including loan terms, interest rates, origination fees, and conditions.  Do your homework – read the fine print and equip yourself with the knowledge to make an educated decision about the loan that is right for you.

Benefits of Federal Loans (Direct Unsubsidized Loans and Direct PLUS Loans)

  • Affordable monthly payments are available; several repayment plans offer payments based on income.
  • Flexible repayment terms allow borrowers to change their repayment plan as their financial goals or situation changes.
  • Loan forgiveness may be available through programs like Public Service Loan Forgiveness (PSLF), and Income-Driven Repayment plans. 
  • Postponing payments during residency and fellowship are possible through grace, deferment, or forbearance options.
  • Most federal loans are eligible for consolidation through the Direct Consolidation Loan program.
  • A student who is not in default and has not exceeded cumulative loan limits may borrow (if eligible) a Direct Unsubsidized Loan, regardless of credit history.
  • Direct PLUS Loans are available to cover any remaining costs (up to the school’s Cost of Attendance). A Direct PLUS Loan DOES require a credit check. If the borrower has adverse credit, an endorser/co-borrower will be needed for approval.
  • Interest rates vary by loan type; however, once a loan is disbursed, it has a fixed rate. Rates are recalculated for each academic year, which begins on July 1.

Before Borrowing a Private Student Loan, Consider the Following

  • Private loan programs may offer variable or fixed interest rates. The rate will have an impact on the total cost of the loan.
  • Variable rates for private loans may start low, but the rate can rise or fall as the rate indexes change. Check to see if there is a cap on the interest rate.
  • Loan rates are based on the borrower’s credit worthiness. A co-borrower may be needed to help secure a better interest rate. (Co-borrower’s credit needs and the length of the co-borrower’s obligation should be considered carefully before committing to the loan). Interest rate indexes can be compared at www.bankrate.com.
  • Repayment may or may not be required while in school, residency, or fellowship. Review the terms of the promissory note.
  • In comparison to federal loan options, repayment, deferment, forbearance, grace, and loan forgiveness options may be limited.
  • Death and/or disability loan discharge may or may not be available. Check with the lender of the loan.

A private loan may make sense if...

  • The borrower is ineligible for federal student aid.
  • The rate of the private debt is lower than the federal debt, and the rate is expected to remain lower for the length of repayment.
  • A borrower is certain of significant income in a short period of time and will aggressively repay the loan, thereby paying less overall.
  • The borrower has access to additional funds to repay the loan even when residency income is limited.

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