government versus private loan

by ann

Dental school is “an investment in my future.” For those interested in how I will be financing this investment, read below. Forewarning, it is a lengthy-and dry-post.

To start, my current cost of attendance- including living expenses- for first year is estimated at $89,300. I’ve been awarded $42,722 in Direct Unsubsidized Loans, which means that I would need an additional $46,578. This is the maximum I would be allowed to apply for in loans and I most likely will not-and should not-need the full amount. Since I won’t be having any financial support from family or a job, I evaluated my loan options. For me, this came down to the Direct Plus Loan and the Discover Health Profession Loan. (Although other financial institutions offer private loans, Discover seemed to offer the best rate.)

To compare whether a government or private loan would better suit my needs, I created a chart based largely off of this one.

Direct Plus Loan Discover Health Profession Loan
Fixed Interest Rate 7.9% 6.79%-7.89%
Variable Interest Rate N/A prime index +0.00% to
prime index +2.50%
(currently 3.25% to 5.75% APR)
Origination Fee 4% of loan principal Zero
Has Income-Based Repayment Yes No
Cosigner option Borrowers with adverse credit history may be required to apply with an endorser May improve your likelihood for loan approval and may lower your interest rate
Auto-Debit Reward 0.25% 0.25%
Graduation Reward No No (fixed rate loans)
Yes (variable rate loans)
Early Loan Repayment Penalty (?) No No
Public Service Loan Forgiveness Yes No
Grace Period 6 months 9 months
Deferment and Forbearance Options Yes Yes

I initially started out with Direct Plus but, based on my research, I’ve put in a Discover fixed interest loan application with my mom as cosigner. Here’s why:

Fixed Interest Rate– Discover has a better fixed rate overall and, if you have a cosigner, you could possibly receive a lower interest rate. My mom has an excellent credit history and should be able to help make that happen.

Variable Interest Rate (& Cosigner Option)- The prime index is currently at 3.25%.  Assuming no additional interest added, at half the Direct Plus loan’s fixed rate, it’s a very tempting offer. Additionally, Discover offers a Graduation Reward for those who have a variable rate loan with the institution. However, keep in mind that the variable rate is subject to change during the lifetime of the loan so you’re taking a gamble. The highest prime index on the July 1, 2007 to July 1, 2012 chart was 8.25% in July 2007, a pronounced difference in five years. Assuming the prime index doesn’t sky rocket, a variable rate loan is the way to go. However, the key word is “assuming,” which is why I decided to stick with a fixed rate loan for peace of mind.

Origination Fee- According to the Texas Guaranteed Student Loan Corporation, an origination fee is charged for each Federal Direct PLUS Loan made. This is reason alone to consider alternative options since 4% of the loan principal is a sizeable amount. Assuming a $40,000 loan each year, you would have to pay an additional $1600. That money then gets compounded with interest which can amount to an additional $10,000 after 4 years. Yikes.

Income-Based Repayment (& Public Service Forgiveness Program)- Direct Plus does have a very appealing Income-Based Repayment, or IBR, which is great for the recent graduate because it will alter your payment amount based on your income and family size. Plus once you’ve initially qualified, you can continue making payments under the plan even if you later no longer have a partial financial hardship. I would also like to highlight that under IBR:

1. If you repay under IBR for 25 years and meet certain other requirements, your remaining balance will be canceled.

2. If, while you are employed full-time for a public service organization, you make 120 on-time, full monthly payments under IBR (or certain other repayment plans) you may be eligible to receive forgiveness of the remaining balance of your Direct Loans through the Public Service Loan Forgiveness Program. (Federal Student Aid)

However, there are also negatives. One being that you may have to pay taxes on the amount that is forgiven or canceled.

Lastly, something not mentioned on the above chart is that loan consolidation is an option for government loans as well as private loans. My college loans- all government- are now consolidated under Direct Consolidation Loans, which only handles government loans. My Direct Unsubsidized Loans will also later be consolidated under Direct Consolidation; if I had taken the Direct Plus Loan, those would have as well. However, private loans can also be consolidated. According to FinAid.org,

Since most private education loans do not compete on price, a private consolidation loans is merely replacing one or more private education loans with another. So the main benefit of such a consolidation is obtaining a single monthly payment. Also, since the consolidation resets the term of the loan, this may reduce the monthly payment (at a cost, of course, of increasing the total interest paid over the lifetime of the loan).

However, since the interest rates on private student loans are based on your credit score, you may be able to get a lower interest rate through a private consolidation loan if your credit score has improved significantly since you first obtained the loan. For example, if you’ve graduated and now have a good job and have been building a good credit history, your credit score may have improved. If your credit score has increased by 50-100 points or more, you may be able to get a lower interest rate by consolidating your debt with another lender. You can also try talking to the current holder of your loans, to see if they’ll reduce the interest rate on your loans rather than lose your loans to another lender.

IBR is advantageous and the options for loan cancellation/forgiveness should be considered but I believe that I’ll be able to make my payments without too much struggle. And, if necessary, Discover, like Direct Plus has deferment and forbearance options.

So that was my thought process through the financial aid ordeal. I’m now just waiting on the school to provide verification. I’ve heard that loan money doesn’t come in until late August/early September so I’ve been saving up through the summer for the initial move-in but it would be a pleasant surprise if my bank account was suddenly replenished by orientation. Wishful thinking, I know…

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