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Money Fix: Part 2 on student loans: private vs. federal

When borrowing for education, keep in mind that

When borrowing for education, keep in mind that federal loans can be consolidated, private loans cannot. Credit: iStock

This week's column is the second of two parts.

Private and federal student loans are a world apart. Educate yourself about the differences.

Option of last resort? "Private loans are best used to bridge the gap," after you've explored government loans, scholarships and grants, says Tracie McGetrick of CU Student Choice in Cranston, Rhode Island, which partners with credit unions to provide private student loans.

Be ready to cosign. Unlike Uncle Sam, private lenders are credit-based. Without a credit history, your young turk will turn to you or grandparents to cosign. If he doesn't repay the loan, you will. If the cosigner dies with the loan outstanding, it's deemed in default. The lender can demand repayment immediately, warns Boyar Doytchinov, a Medford financial adviser.

Watch rates. Private loan interest rates are generally higher, and "unsubsidized loans accrue interest from the time they are disbursed," explains Joseph Trentacoste, student services assistant vice president at Mercy College in Dobbs Ferry. Private loans often have variable rates. Even if you get a variable rate around 5 percent, rates can increase over the life of the loan.

Look out after graduation: Federal loans can be consolidated, private loans cannot. You also won't get a menu of repayment and deferment options with private loans.

Shop around. Credit unions often offer more favorable rates than banks. Cast a wide net. Discover Student Loans offers no origination, prepayment, late payment or return payment fees. It also has a 1% Cash Reward for Good Grades program.

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