Types of Student Loans

The Difference Between Federal and Private Student Loans

There are two types of student loans: federal loans and private loans. Within each of these two categories, you have several different choices. But within all of these choices, there are distinct differences between them, and you need to be aware of the differences. Being armed with knowledge about these loans could potentially help you save money in the long run.

What is a Federal Loan?

Let’s talk about the federal loans first. By definition, a federal student loan is a loan that is given to you by the government. Not only will you have to repay the loan, but you will also be charged an interest rate for this loan.

 

Federal loans are very popular among people who need to borrow money for education. There are lots of reasons why they are so popular, which we will get into a little further.

 

Typically, there is a limit to the amount you can borrow under the federal loan programs. Depending on which type it is, then that could make a huge difference in the amount you are allowed to borrow.

 

Reasons to Consider a Federal Loan

As mentioned earlier, there are several benefits to a federal loan which is why it remains a popular option including:

Fixed Interest Rates

The current interest rates are listed under each type of loan, but it’s also important to mention that your interest rate will be locked for the length of the loan. You do not have to worry about a fluctuation in your rate due to your circumstances, the economy, or forces outside of your control. 

No Need for a Credit Check or Co-Signer

Most of the federal loans (with the exception of the Direct PLUS Loans) do not require a credit check or someone else to cosign for you. This can be especially welcome news if you know your credit is less than stellar or perhaps you don’t want anyone else to co-sign a loan for you.

Repayment Will Begin After You Leave College

Payment plans typically do not begin until after you have completed your school. If you do drop to half-time or less, then you will have to start paying on the notes.

Flexible Repayment Terms

There are several different options when it comes to repaying your federal student loans. And if you aren’t sure which repayment plan is the best for your situation, then you can always switch at a later date.

There are also options for repayment that are under a program referred to as the Income-Driven Repayment Plan. There are a few choices that fall under this payment plan, so you will want to familiarize yourself with the benefits of each plan.

Not All Loans are Based on Financial Need

Not everyone has the same set of financial circumstances when it comes to needing student loans. No matter how much money you or your parents make, you can still apply for some type of student loan.

Some Federal Student Loans Can Be Forgiven

Yes, you read that correctly. There are programs in place where federal student loan debt can be forgiven. There are many, many nuances to these programs (remember how we said nothing was simple?) but they are important to be aware of early in your education. This program for forgiveness is referred to as the PSLF or the Public Service Loan Forgiveness program. Since it only applies to federal loans, this may be a potential benefit that you will be able to participate in with a federal loan.

Process for Obtaining a Federal Loan

When you are ready to apply, you will need to complete and submit the Free Application for Federal Student Aid (also referred to as the FAFSA form). While this form may sound a little intimidating, it’s actually the one form you will need to fill out to see if you also qualify for grants and other financial aid.

There is also an app you can download to make the process even more convenient for you. You can have all your information in one place and use one application for multiple different types of resources.

What is a Private Student Loan?

Now that you know all about federal loans, let’s switch gears and talk about private loans and what makes them different. Private loans are simply loans that are lent to you by a bank or a credit union. The bank (or credit union) is the lender, instead of the federal government.

If you have maximized your federal loan options. then that is when you should begin the process of obtaining a private loan.

Types of Private Loans

Private loans have several variations within them, think of it as being similar to options for a mortgage.

You can apply for a loan that has a fixed interest rate, or a variable rate. You can choose one that has a shorter repayment term versus a longer one.

You should also perform your due diligence when it comes to shopping around for these types of loans. You may find more favorable terms or a lower interest rate just by comparing several different companies.

There may even be restrictions in place from a private lender depending on what state you live in.

Another point to consider with private loans is if there is typically a limit to the amount you can borrow. You will need to make sure you understand upfront what the maximum amount is that you are able to obtain. The amount that is loaned to you for private loans is generally quite a bit smaller than the amount available through the federal programs.

Lastly, since all private loans are completely unsubsidized, this means you will accrue interest on the loan from the very beginning of the loan term.

Process for Obtaining a Private Student Loan

Because private student loans are distributed through various lenders, you will have to follow each lender’s various guidelines. You will have to fill out an application to each and every lender, unlike the one FAFSA form that covers all things (loans, grants, student aid) federally related.

The process of obtaining a private loan is going to be more rigorous compared to that of a federal loan. You will need to have good credit or the person who is co-signing the loan will need to have it. If either you or the co-signer has a low credit score then it’s going to be significantly harder to obtain a private student loan.

Why Does it Matter Which Type of Student Loan It Is?

Perhaps you are reading this and you are already down the path of having several student loans to your name. If that’s the case, it’s still worth your time to make sure you understand which type of loans you have.

When you are putting a plan in place to tackle your student debt, you will need to list out all of your loans and the amounts that are owed. You will also need to know which ones are private and which ones are federal, so you can compare how the repayment plans will work.

Which is better for me – a Federal Student Loan or Private Loan?

This is where you really have to make sure you have done your homework so you can figure out if a federal loan versus a private loan option is the best option, or to see if perhaps you need both.

Generally speaking, federal loans should be your first option. If you are going to get a lower interest rate, then it makes sense to take advantage of that so you pay less in the long run. With a lower interest rate, you will pay less over time, it’s as simple as that.

Of course, there are also all the other benefits to consider when it comes to the federal loans – the flexible repayment terms, the ability to consolidate in the future, and the fact you don’t have to have credit-worthiness. Plus, you may need a substantial amount of loans to cover your many years of education. All of these benefits make a strong case for federal loans.

If you have good credit or someone who is willing to cosign for you, and you only need a small, manageable amount for a loan, then a private loan could be a good option. It might also be your best – and only – option if you have maximized the number of federal student loans already. Since you are able to shop around with a private loan and choose your lender, then it’s possible you could receive a more competitive interest rate or a loan term that is better suited.

How Will These Loans Impact My Future?

Whether you are about to embark down the road of student loan applications or already have student loans to your name, being armed with as much information as possible is the first step towards a financial plan.

While it may seem obvious, remember, you will have to pay back these loans at some point and nothing is free. It will have a direct impact on your credit if you are late or miss payments for these loans. So, knowing exactly which loans you have and the repayment terms are key to paying them off.

Yes, choosing a federal or a private student loan will involve research and paperwork on your part. There are going to be times when it almost feels like the loans are written in a different language. The good news is now you know the difference between federal loans versus private loans and you can start making informed decisions about your financial future.

 

The Difference Between Federally Owned and Federally Backed/Commercially Owned Federal Student Loans

Some federal student loans are not owned by the federal government but are actually owned by commercial lenders. 

 

Federally Owned Student Loans 

Federally owned student loans are owned by the Department of Education and are a part of their debt portfolio. These loans are controlled by the Department of Education’s policies but are managed by Loan Servicers. Loan Servicers are entrusted to follow the Department of Education’s guidelines. 

 

Federally Backed Student Loans

Federally backed student loans are owned by commercial lenders, just like private student loans. However, federally backed student loans are backed by the Department of Education. Because lenders have the protection from default risk, they are typically able to offer lower rates – comparable with private student loans. 

 

Federally backed student loans typically will not qualify for forgiveness programs enacted by the Department of Education. Because they do not own the loans, the Department of Education cannot “write-off” loans owned by other entities. 

 

The majority of FFELP loans and all Perkins loans are commercially owned but federally backed.

 

During the Financial Crisis of 2008, some of the FFELP loans were bought by the Department of Education during debt restructuring. This caused them to be federally owned, not just federally backed student loans and allowed them to be included in more programs such as the provisions set in the CARES Act of 2020 due to the Coronavirus pandemic. 

 

To determine if your FFELP loans are federally owned or commercially owned, call your loan servicer. 

 

The Difference Between Subsidized and Unsubsidized Student Loans

The main difference between subsidized and unsubsidized student loans is how and when you’re charged interest. Subsidized student loans are preferable because you are not charged interest while in school and during the grace period. However, there is a limit to how much you can take out in subsidized student loans that varies based on your year in college and your dependency status. 

 

Most borrowers have a mix of subsidized and unsubsidized student loans. 

Subsidized Student Loans

This is a loan that is available to undergraduates only and ones that have demonstrated they need financial aid.

 

As an FYI, financial need is defined as the difference between the cost of the school you want to attend and how much you or your family can contribute towards the cost of your education. While the cost of the school could change (for example, if you change schools) your family contribution on the application will not change.

 

The interest rate for the Direct Subsidized Loans administered between July 2018 to July 2019, is set at 5.05%. The maximum amount you are allowed to borrow for this type of loan is up to $5500 annually. The amount of loan you qualify for is dependent on your year in school and if you are considered a dependent or independent student.

 

Another important distinction with these loans is that you will not accrue interest while you are in school (this is where the word Subsidized comes in). This is a very important factor to consider as you evaluate which loan type is the best for your wallet.

 

Unsubsidized Student Loans

Another type of Direct Loan is what’s referred to as a Direct Unsubsidized Loan. These loans are available to undergraduate students, those attending graduate school, as well as professional degree students.

 

The biggest difference between these types of loans and the Direct Subsidized Loans (besides being available to those in graduate school and professionals) is that you do not have to demonstrate financial need in order to qualify.

For the unsubsidized loans administered between July 2018 and July 2019, the interest rate on these loans is set at 5.04% for undergraduate students, and 6.6% for graduate and professional degree students.

Unlike the subsidized version, your interest will accrue while you are in school. The interest will be added to your loan balance once your grace period is up and you have to begin loan repayment.

The maximum loan amount annually for these types of loans is up to $20,500. But like the subsidized versions, it depends on what year you are in school as well as your status as a dependent.

 

Why Your Student Loans Have a Principal and Interest Balance

If you’ve ever checked your student loan balances, you probably noticed that for each loan you have a principal balance and you have an interest balance. 

How Interest Is Charged

Interest is charged on the principal balance only, so if you owe $300,000, but $50,000 of that balance is accrued interest – you’re only being charged interest on $250,000. 

 

This is helpful to ensure that your interest does not compound during times that you are not making a high enough payment to pay down the new interest charges each month. Especially during residency, when you might have a $300-$400 monthly payment, but a $1,000-$2,000 monthly interest charge. 

Application of Additional Payments

Making additional payments towards your federal student loan does not mean that your payment will go towards paying down your principal balance. 

 

You might not be paying towards your principal balance if you have an accrued interest balance, because payments are applied to accrued interest first.

 

Once your accrued interest balance is paid off, you can make additional payments to go towards paying down your principal balance. 

 

Direct Consolidation Loans

Besides the advantages and disadvantages that go along with consolidation, there are other points you need to take into account.

 

The process for consolidating all of your federal student loans into one loan is called a Direct Consolidation Loan. The government will continue to be the lender for this type of loan, just as it has for your student loans.

 

All types of federal student loans are eligible for the consolidation program. It can be a subsidized loan, an unsubsidized loan, Stafford Loans, FFEL, or Perkins Loans (just to name a few). Your federal loans also have to be in your name. So if your parents took out a PLUS loan, then that will not roll into a consolidated loan.

 

The Difference Between Consolidating and Refinancing Student Loans

Maybe it’s the sky-high amounts of student loan debts that continue to mount for you personally. Or perhaps the news articles you keep reading about with the potential medical student loan crisis we are facing as a country.

All of these point to one thing – people need some sort of relief from the amount they pay each month towards student loan debt.  

No doubt as you have finished your years of school and training and are starting to focus on your practice and career that you’ve wondered if there’s anything you could do to feel some of this relief.

This is where the words “consolidation” and “refinance” often come into play for borrowers. Many financial experts are quick to point to these as solutions. But like so many other aspects of your student loan debt, it’s not a one-size-fits-all approach that works best for everyone.

What exactly does consolidation versus refinance even mean? Is it something you could consider for your medical student loans? Does it make sense for your situation and the amount of loan debt you are carrying?

Let’s take a look at what consolidation and refinance could mean for you so you can decide if either of these are options for your loans.

What Happens When You Consolidate Your Federal Student Loans

When you consolidate your federal student loans into a Direct Consolidation Loan, your loan servicer takes all of your individual loans and merges them into a new one. 

 

They’ll keep subsidized and unsubsidized loans separate, so you may see two Direct Consolidation Loans in your account when the consolidation is processed. 

 

The very definition of consolidation is the process in which you combine a number of things into a single whole. In the case of student loan debt, it’s the process of combining several loans into one monthly payment. This is different from refinancing in that your interest rate is based on the weighted average interest rate of all the combined loans.

 

You are actually not obligated to consolidate all of your federal loans into one loan unless you choose to do so. It may be beneficial to you to keep some loans out of the consolidation process, particularly if it has a low-interest rate or more favorable repayment term.

 

Changes to Your Interest Rate

The new interest rate is equal to the weighted average interest rate of the loans that were merged into the new loan, rounded to the closest ⅛ of a percent. 

 

Here’s an example, let’s say I have the following loans: 

 

Balance Rate
$25,000 5%
$50,000 4%

 

The new loan will have an interest rate based on the following formula: 

 

Step 1: Find the total balance

(Loan 1 Balance $25,000 + Loan 2 Balance $50,000) = Total Balance $75,000 

 

Step 2: Get the weighted rate of each loan

 

Loan 1

Loan 1 Balance $25,000 /  Total Balance $75,000 = Weight of Loan 1: 33% 

 

Weight of Loan 1: 33%  * Rate of Loan 1: 5% = Weighted Rate of Loan 1: 1.65%

 

Loan 2

Loan 2 Balance $50,000 /  Total Balance $75,000 = Weight of Loan 2: 67% 

 

Weight of Loan 2: 67%  * Rate of Loan 2: 4% = Weighted Rate of Loan 2: 2.68%

 

Step 3: Add the weighted rates up

Weighted Rate of Loan 1: 1.65% + Weighted Rate of Loan 2: 2.68% = Weighted Average Rate 4.33%

 

Step 4: Round to the closest ⅛ of a percent

Weighted Average Rate 4.33% > Rate of New Loan = 4.375%

 

If you have many loans, this process of finding the weighted average rate is best done using an online calculator or a spreadsheet. 

 

If I consolidated these loans, I would go from a monthly interest charge of $270.83 to $273.44. So, by having my rate rounded up to the closest ⅛ of a percent, I am charged an extra $2.61 in interest every month, ignoring possible interest subsidies. 

 

Why would a borrower want to consolidate their loans if their interest rate could increase? To gain access to certain forgiveness programs, some borrowers need to consolidate their loans into a Direct Consolidation Loan if the type of loans they have do not currently qualify. If you’re pursuing a forgiveness program, the extra interest charges each month don’t matter because your goal is not to pay off the loan yourself. 

 

If your federal student loans currently have a variable interest rate, then consolidation will provide you with a fixed rate. For those of you who took out federal loans prior to 2006, when variable rate loans were available, then this could be a real incentive.

 

Losing Prior Credits Towards Forgiveness Programs

When you consolidate your loans, you are essentially taking out a new loan. By doing this, you’ll lose any prior credit earned towards forgiveness programs such as Public Service Loan Forgiveness and Time-Based Forgiveness on an Income-Driven Repayment Plan for the loans you consolidate. 

 

Consolidating to End Your Grace Period

If you just graduated from medical school, you can end your grace period early by consolidating your student loans into a Direct Consolidation Loan. 

 

You’ll need to wait for your status to be updated to graduated with your loan servicer before applying for the consolidation loan, otherwise, your application will be denied. 

 

Many recent medical school graduates consolidate their loans a month or two after graduation to begin repayment early. If you can time your applications right, it’s possible to enter into repayment on an Income-Driven Repayment Plan before you start residency and have an income. By doing this, you could be able to lock in a $0 payment for your first year of residency.

 

Access to New Repayment Plans

By consolidating your federal loans, you are then eligible to participate in income-driven repayment plans. We have spent a lot of time in our podcasts and the blog discussing the different income-driven repayment options and it is worth mentioning again because this is such an important part of managing your debt.

If you choose to go the route of a Direct Consolidation Loan for your federal student loans, then you will be eligible for income-driven repayment programs. There are several repayment programs that are offered under this umbrella.

There is the REPAYE, the PAYE, the IBR Plan, and the ICR Plan and each one has a different repayment amount, based on your income. There are also other programs that are referred to as Standard, Graduated, and Extended. It’s important to familiarize yourself with each of these programs, especially if you choose to consolidate your federal loans.

These income-driven repayment plans are a big advantage to anyone with federal loans, as they allow you to manage your monthly payments depending on your current financial situation, your family situation, your income, and other factors.  If you need further information and need help choosing a repayment plan, then you can start with the student loan repayment estimator.

What Happens When You Refinance Your Student Loans

Many people confuse this term with consolidation, but it’s actually a very different concept.

Refinancing your student loans is simply the act of taking out a new loan to pay off one or more of your student loans. You can choose to refinance several loans or only one. Almost always, the number one reason for someone considering a refinance option is to lock in a lower interest rate on their loan.

Here is where it starts to get a little more confusing – private lenders will refinance both your federal and private student loans. However, the government will not refinance any of your loans.

High-Interest Rate Loans

If your private student loans have higher interest rates, and you are able to refinance to one, single lower interest rate, then refinancing could make sense. You should be able to calculate how much you can save by refinancing one or more of your loans.

 

Private Loan Holders

We only recommend refinancing your private student loans for several reasons. Here are the biggest reasons why.

  • If you refinance your federal student loans then those payments will no longer count towards your PSLF eligibility. This is one of the major reasons we do not recommend the refinance of your federal student loans.
  • Refinancing your federal loans will also interfere with your repayment plans. If you have any federal loans and are currently enrolled in any of the repayment programs (PAYE, REPAYE, IBR for instance) then you would lose eligibility if you decide to refinance your federal loans with a private lender.

You may be tempted by the lower interest rate that comes with a refinance – after all, the lenders are competing for your business. However, the lower interest rate can’t compete with how much you could save by having your student loans forgiven through the PSLF program.

The Convenience of One Payment

Of course, just like with the process of consolidation, refinancing into one loan will have the added benefit of a convenient, singular monthly loan payment.

 

Refinancing your private students may actually be a smart financial move for you, but only if you are paying less in interest and saving money over the life of the loan.

 

You may be wondering if it is wise to consider a refinance while you are a resident. Refinancing during your residency is not recommended unless it is for your private student loans only.

 

The primary reason for this is because during your residency you may not have decided if you will take part in the PSLF program. By refinancing your federal loans, you will wipe out any chance you have of participating in the PSLF program and paying off your loans through that route.

 

If you decide to go down the path of refinancing, whether it’s your private or federal loans (or both), then you will have to do your homework to compare rates. Just like you would shop for a home mortgage based on different interest rates and payment terms, the same is true for a refinance option.

 

You will want to compare information from several private lenders such as banks, or if you qualify for a credit union.

 

Making the Decision to Consolidate or Refinance Your Student Loans

The first step involved in deciding on consolidation or refinancing is to have a clear understanding of the amount of student debt you have. Take a moment (or two!) to list out all of your federal loans, your private loans, the interest rates, and the repayment terms for all of them. While it may seem daunting at first, the best way to make a financial decision is to tackle it head-on.

If you are unsure how many loans you have, try logging into your federal student loan portal first. This will give you all the information you need in regards to your federal loans. If you need information regarding your private loans, the quickest way to double-check your information is to pull a credit report.

There are also multiple calculators available to help you compare monthly payments, number of years, and the amount you will pay over the life of the loan. If you are still confused by it all and would like additional help, you can always consult with a fee-only financial planner to get specific, actionable advice in regards to your financial situation.

Hopefully after laying out all of this information you have a better understanding of if and when a consolidation or refinance of your medical student loans might make sense.

Our goal at FinancialResidency.com does not only provide you with information on all of these different financial terms, but also the impact that these financial decisions could have on your long-term fiscal health. We know there are many choices when it comes to student loans and it can be downright overwhelming. But knowing the resources that are available to you, whether it’s for consolidation or refinancing, is an important step in feeling relief from student debt.

Health Education Assistance Loans (HEAL)

These student loans were offered until 1998 for medical students who showed the financial need. Health Education Assistance Loans (HEAL) were unsubsidized, federally backed student loans. Private lenders originated the loans, which were backed by the Department of Education, and schools disbursed the funds. 

 

HEAL loans could have a variable or fixed-rate loan. For variable rate HEAL loans, their rate was set to the value of a treasury bond plus 3 to 3.5%. 

 

The grace period for HEAL loans was 9 months after the completion of training programs, such as residency or fellowship. 

 

For borrowers who currently have HEAL loans, there are a few important aspects of these loans you need to know about. HEAL loans do not have favorable default terms, lenders are actually required to take legal action if you default on your HEAL loan. 

 

HEAL loans have access to income-sensitive repayment plans through individual lenders. These loans can possibly be consolidated into a Direct Consolidation Loan to gain access to more favorable repayment plans and default terms. 

 

FFEL Program Loans (FFEL / FFELP)

FFEL is short for the Federal Family Education Loan and were private loans that were backed by the US government. This is also a now-defunct federal lending program. This program ended in 2010, but you may still see eligibility for these loans whenever you are applying for a repayment plan.

 

FFEL loans are held by commercial lenders, the federal government backs these loans, but it does not have the same level of control over them as they do with Federal Direct or Stafford student loans. 

 

Some FFEL loans were purchased by the Department of Education in 2008/2009 during debt restructuring. If the ownership of your FFEL loan was transferred to the Department of Education, you might qualify for special provisions that affect Direct Loans as well – such as the CARES Act of 2020. 

Perkins Loans

Perkins Loans are low-interest federal student loans for undergraduate and graduate students with exceptional financial need. 

 

The Federal Perkins Loan program ended on September 30, 2017, but you may still come across this type of loan as you are researching. This was a program for both undergraduate and graduate programs to qualify for federal loans based on financial need.

 

Perkins Loans are owned by schools and backed by the Department of Education. 

 

Repayment plans and deferment options should be discussed with your loan servicer. 

Stafford Loans (Direct Federal Loans)

Federal Stafford Loans are also known as Direct Loans and are offered through the William D. Ford Federal Direct Loan Program. 

 

These loans are owned by the Department of Education, making them federally owned student loans. 

 

For new loans taken out before July 1, 2020, the current interest rate is 4.53% for undergraduate students and 6.08% for graduates and professional degree students. You won’t need perfect credit to qualify for these rates, a credit check is not required to take out Direct Federal Loans. 

 

Direct Subsidized Loans

Direct Subsidized Loans do not accrue interest during qualifying periods, such as when you’re in school and during the grace period. 

 

To take out a Direct Subsidized Loan, you’ll need to show financial need. 

 

The annual award limit is currently up to $5,500 but varies based on your grade level and dependency status. There is also a lifetime limit, which is published on the Department of Education’s website

 

You can borrow subsidized loans up until 150% of the length of your degree. So, if you’re in a four program, you can borrow subsidized loans for a maximum of six years. 

Direct Unsubsidized Loans

Direct Unsubsidized Loans are the most popular form of federal student loans. These are not based on the financial need of the borrower but do not have deferred interest charges as subsidized loans do. 

 

These loans are available to undergraduate, graduate, and professional students. The 150% rule for subsidized loans does not apply to unsubsidized loans. 

 

Parent PLUS Loans

Parent PLUS Loans are a form of Direct PLUS Loans that are made to the parents of dependent undergraduate students. Many parents take out these loans to pay for the education of their children. 

 

You won’t need to show a financial need to take out a Parent PLUS Loan, however, your credit will be checked. If you have an adverse credit history, you will need to meet additional requirements to qualify. 

 

Having your parent take out a Parent PLUS Loan could be a good opportunity to save money if your parent qualifies for Public Service Loan Forgiveness and has a low income. 

 

Graduate PLUS Loans

Graduate PLUS Loans are the other form of Direct PLUS Loans. These loans are made to graduate or professional students. 

 

You won’t need to show a financial need to take out a Graduate PLUS Loan, however, your credit will be checked. If you have an adverse credit history, you will need to meet additional requirements to qualify. 

 

Loans for Disadvantaged Students 

Loans for disadvantaged students are offered by schools through funding from the federal government, making them federally backed student loans. They are awarded based on needs-based guidelines. 

 

To be eligible for these loans, you must be enrolled full-time in a program that leads to one of the following degrees:

 

  • doctor of allopathic medicine;
  • doctor of osteopathic medicine;
  • doctor of dentistry;
  • bachelor or doctor of science in pharmacy;
  • doctor of podiatric medicine;
  • doctor of optometry; and
  • doctor of veterinary medicine.

 

Most borrowers with a loan for disadvantaged students have a 5% interest rate that was set by Congress in 1988. 

Private Student Loans

Private student loans are not federally owned or federally backed. These loans are made by banks, such as SoFi or CommonBond. 

 

Variable Rate Student Loans

Private student loans typically have a fixed interest rate but can have a variable rate that changes as its underlying benchmark changes. Variable rates were no longer available on federal student loans that were taken out after 2006. 

 

Unlike a fixed-rate loan, a variable rate loan changes as the LIBOR or federal fund rate does. Normally, this rate is the benchmark rate plus an additional few percentage points. Some lenders set a cap on how low their variable rates will go, so be sure to check the fine print on the terms of your loan. 

The federal funds rate is the rate banks charge each other when they exchange money. 

This is not the only rate that is used to set the rates we pay on debt though. LIBOR, or the London Interbank Offered Rate, is typically used by private lenders, including for variable rate private student loans. LIBOR is the rate that global banks charge each other for short-term loans. 

The federal funds rate and LIBOR are typically in sync with each other. As one falls, the other typically does as well. 

You can also consolidate your variable-rate federal student loans into a federal direct consolidation loan to lock in a fixed rate. If you are already pursuing Public Service Loan Forgiveness, do not consolidate your federal student loans as this will reset your qualified payment count. 

You won’t see many forgiveness programs associated with private student loans, however, some physicians are able to obtain employer assistance with repaying their private student loans in their contract. 

 

Due to private student loans having fewer benefits, compared to federal student loans, they typically have lower interest rates – making them a great option for borrowers who are crushing their student loans. 

Ryan Inman