How to Decide Between Federal and Private Student Loans
My name is Nikhil Agarwal. I graduated from Harvard Business School in 2020 and have helped thousands of students with more than $500 million of student loans over the last three years through Juno, an organization that negotiates the lowest rates for MBA student loans.
Read on to learn more and decide if federal, private, or a mix of federal and private student loans are the best fit for your MBA student loans.
The TL;DR Version
Reasons to Select Federal Loans
You are pursuing a career that would make you eligible for Public Service Loan Forgiveness, or you may need to utilize an income-driven repayment plan. I recommend reading more about these benefits on the government website before deciding to go down this path.
Your creditworthiness makes you ineligible for a private student loan, or the private student loan rates are more expensive than your federal student loan options.
Reasons to Select Private Student Loans
You want to pay the least amount of interest possible, and your private student loan option is more affordable than both the federal Direct Unsubsidized Loan and the federal Grad PLUS Loan.
Note: For almost all MBA Juno members, the negotiated rates are expected to beat the federal Grad PLUS Loan rates. For a majority of MBA Juno members, the negotiated rates are expected to beat the Direct Unsubsidized Loan rates as well.
Reasons to Use a Mix of Federal and Private Student Loans
You want to pay the least amount of interest possible, and your private student loan quote is better than the Grad PLUS loan rates but worse than the Direct Unsubsidized Loan rates.
You believe President Biden may forgive student loans (we’re not sure it’s going to happen, and here’s why) and want to ensure you have at least some amount of federal loans ($10,000 to $20,000) so you can take advantage of the forgiveness program.
There are important differences between private and federal student loans. Remember that you can choose to use private, federal or some combination of both to finance your education.
Private Student Loans
Private student loans are offered by private banks and lenders. To get these loans, students must apply directly through the lender’s website. We encourage you to utilize Juno, as we offer negotiated private student loan options through which you can get lower rates than you would if you went directly to the lender.
How Are Private Loan Interest Rates Set?
Every private lender has its own unique underwriting process and standards for student loan applicants. These eligibility requirements help lenders decide whether to give an applicant a loan and at what interest rate.
As part of the loan application process, lenders will conduct a credit check to evaluate your ability to repay and how risky you are. If you have a credit score in the high 600s, you will likely qualify for a loan. The higher your score is, the better the rate you are offered. Lenders consider other factors such as your debt-to-income ratio, income and your co-signer’s credit score as well.
After you apply and are approved for a private student loan, you will usually get to choose between multiple options, including the following:
- Variable or fixed interest rates
- Loan term (also known as the repayment term)
- Repayment plan
You can read this article on making the best choice for your budget. Different options typically have different interest rates so it’s smart to compare all the choices.
Federal Student Loans
Federal student loans are offered by the federal government.
While there are many types of federal student loans, domestic MBA students can typically access Direct Unsubsidized Loans (up to $20,500), and Direct PLUS Loans, also known as Grad PLUS Loans (up to the cost of attendance minus any other financial aid you receive). Most applicants qualify, and the rates are the same for all eligible students.
How Are Federal Loan Interest Rates Set?
All federal student loan interest rates and fees are set by Congress on July 1 of each year and remain fixed for the life of the loan. Students who need financial aid apply for loans each academic year, and rates differ from academic year to year (meaning that when you graduate, each loan for each year of school likely has a different interest rate).
Note that for the upcoming year, we expect the rates to be higher than the current ones. For loans disbursed after July 1, 2021, and before July 1, 2022, the interest rates and fees are as follows:
|Direct Unsubsidized (Federal)||Direct PLUS (Federal)||Juno Partners (Private)|
|Maximum Loan Amount||$20,500||Up to the cost of attendance minus other aid received||Up to the cost of attendance minus other aid received|
|Interest Rate||5.284% until July 1, 2022||6.284% until July 1, 2022||Will vary based on creditworthiness; starts at 2.94%|
These rates and fees are set each academic year and take effect on July 1.
*Origination fees vary slightly based on when you take out your loan in the school year. The fee is updated every year for loans disbursed on or after Oct. 1, meaning that if you borrow the same amount of money each semester, your origination fee will likely be different. Fees for loans after Oct. 1, 2022, have not been determined yet.
Steps to Decide the Best Option for You
Step 1: Get Quotes from Juno (and Other Private Student Loan Options)
Some lenders will allow you to get a quote using a soft credit check; others will ask you to get a hard credit check. The impact of a hard credit check is minimal. Therefore, we recommend getting your quotes regardless of whether the lender offers a soft credit check option.
Among the places you shop around, we encourage you to include Juno. As I mentioned earlier, Juno works to negotiate lower rates for MBA students and has been the most popular option for MBA student loans for a few years now. Further, Juno has a generous guarantee program that ensures the negotiated option will be lower than anything you can find yourself outside Juno.
Step 2: Compare Federal Loans and Your Best Private Options
Once you have your quotes, you can compare them to your federal loan options. There are two factors that makes the process slightly more complicated than comparing only the interest rates:
- Federal loans have origination fees.
- Private loans have a variety of repayment options.
Both these factors move the needle in favor of private student loans. Therefore, you can use the following process.
First, look at a private student loan with the following options:
- 7-year term or 10-year loan term
- Fixed interest rate
- Fully deferred repayment plan ($0 per month while in school) or $25 per month in school
We are using that selection because it is most similar to the terms of a federal student loan on the standard repayment plan.
Now, you can use this calculator (make a copy of the Google Sheet and fill out the yellow cells) to ensure that you are accounting for the origination fee. The results in the gray cell will give you your cost optimal loan selection.
Remember to compare the costs and the other benefits and protections. Federal loans are great if you are pursuing a career that would make you eligible for Public Service Loan Forgiveness or if you may need to utilize an income-driven repayment plan.
That’s it! I hope I was able to help you decide if federal loans or private loans are a better fit for you. I promise that this is my last plug for Juno. I’m immensely proud of the options we’ve negotiated for MBA students and would love to see you take advantage of them.
Let me know if you have any questions. You can email me at [email protected].