Most California students of higher education will need to take out student loans in order to pay for their educational costs. From tuition to living expenses, these costs frequently add up to a significant sum that must be paid back after graduation, so choosing loan options—and their accompanying interest rates and terms—is especially important. Student loan borrowers in California have the option of both federal and private student loans.

Federal Student Loans

The majority of student loans taken out each year, both in California and across the nation, are federal loans. Federal student loans are made or insured by the federal government. In the past, some federal student loans were originated by private lenders but backed by the federal government. However, these days all federal loans are also originated by the government, although they may be serviced by private companies.

One of the advantages of choosing federal student loans is that there is no credit check for undergraduate borrowers, and only an adverse credit history check for graduate and parent borrowers under the PLUS loan program. This is advantageous to those just entering an undergraduate course of study, who might have little or no credit history. These borrowers have frequently just graduated high school and may have never held a job, much less established a positive credit history. Their credit score, including a lack thereof, has no impact on their ability to take out federal student loans to pursue a degree.

For borrowers wishing to attend graduate or professional school, or parents wishing to borrow federal student loans to pay for a child’s schooling, PLUS and Grad PLUS loans are available. To be eligible for the PLUS loan program, a borrower must not have an adverse credit history, meaning their credit report must not have certain defaults, charge-offs, foreclosures, repossessions, or outstanding delinquencies. To find out the specifics of what is allowed and not allowed, visit the Federal Student Aid website.

Subsidized Federal Loans

Interest rates on federal student loans are always fixed, and the same rate is available to everyone regardless of credit score or income. At the time of this writing, federal loans can start as low as 3.76% and go as high as 6.31%, depending upon the program. Applying for federal loans starts with submitting the FAFSA—the Free Application for Federal Student Aid. The FAFSA has recently been made available earlier than ever before.

Potential borrowers can submit their application in October of the year prior to the beginning of the academic year for which they are seeking aid. If the borrower qualifies for subsidized student loans then they will be offered as much as they qualify for before being offered unsubsidized ones. Subsidized student loans are another hallmark of federal aid, and they allow a borrower to save a lot of money on interest.

When the federal government gives a borrower a subsidized student loan, it means the government is agreeing to pay the accruing interest on that loan while the borrower is enrolled at least half-time in their course of study. Not only does the borrower not have to pay interest, but interest does not accrue and capitalize into additional principal. Only a certain allotment of subsidized loans are available per borrower, depending upon their course of study and year in school, as well as their individual financial circumstances. Graduate and professional students must borrow under the Grad PLUS program, which does not offer subsidized loans.

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Repayment Flexibility

Federal student loans offer a great deal of flexibility upon repayment. For starters, federal loans offer a grace period of six months before repayment begins. Borrowers who experience financial hardship, such as loss of employment, can also qualify for deferment and forbearance options.

Deferment allows a federal borrower to defer the repayment of their loans and the government will pay the interest during that time. There is generally a three-year limit on deferment, which is typically offered in six-month increments. Forbearance is another option available to borrowers undergoing financial distress. Forbearance is discretionary on the part of the federal student loan servicer, and is limited to a total of twelve months.

Perhaps the repayment program that gets the most attention is that of income-driven repayment plans, or IDR. Under IDR, depending upon a borrower’s chosen program and when they first became federal borrowers, their monthly repayment amounts can be limited to between ten to twenty percent of their discretionary income. Sometimes this results in monthly payment amounts of zero dollars. Borrowers utilizing IDR programs must re-certify their income annually.

Private Student Loans

Although federal student loans are generally easier for borrowers to qualify for, and often offer the most competitive rates, a subset of California borrowers will be arguably better off with private student loans. This subset of borrowers will have established credit histories and a steady income. Typically, but not always, they will be going to school to obtain their degree after spending several years post-high school working and establishing credit.

Since they have excellent credit and a proven track record of income, they are considered a much lower risk to private lenders and thus are able to obtain student loans are rates unavailable to typical high school graduates. When those rates are lower than those available from federal student loans, private loans are a less expensive option.

Qualifying for Private Student Loans

Private student loans always require a credit check, and sometimes have minimum income requirements. For borrowers who cannot meet the minimum requirements on their own, many private lenders allow and encourage cosigners. However, cosigners should be very aware that by cosigning a loan they are essentially accepting full responsibility for its repayment if the co-borrower fails to pay. If payments aren’t made, the negative credit reporting will bring down the cosigner’s credit score just as if they were the primary borrower on the loan.

Why Use Private Student Loans?

Well-qualified California borrowers may wish to take out private loans instead of federal loans because they are offered a more attractive interest rate. Even borrowers who turn to federal loans first may need to turn to private loans to fill the gap left over between what is available from the government and what their true cost of tuition and living expenses turn out to be.

Some private lenders offer extended repayment plans and deferment if the borrower goes back to school, but many do not, so it’s important for would-be borrowers to read all the terms carefully and understand when and how repayment begins. Only by examining and comparing the benefits and disadvantages of available federal and private options can each California borrower determine the mix of loan options that are right for them.