federal vs private grad loans

Why Should I take out a federal loan for grad school?

Michael Lux Blog, Student Loans 3 Comments

A common question faced by graduate students is, “How on Earth am I going to pay for this program?”

The people who opt to fund their education are often advised to take out federal student loans instead of private student loans.  Savvy future grad students are quick to point out that the federal loans often have higher interest rates than comparable private loans.

Does the lower interest rate make a private student loan a better option?

The answer is definitely no… and its not even a close call.  There are three key reasons.

1. Federal loans offer much better repayment plans

Most entering grad students have grad plans about the great money they will be making after they finish grad school.  The unfortunate reality is that like undergrad, not all graduate students find great jobs.  Many end up unemployed or underemployed.

Because almost nobody knows for 100% certainty that they will have a great job when they graduate, federal loans are a much better alternative.  They offer repayment plans based upon your income and have loan forgiveness programs.  These plans and programs provide a great backup if that high paying job doesn’t come through.

2. With Federal Loans you can avoid the cosigner

Meeting the minimum credit requirements for a federal loan is much easier than meeting it for a private loan.

Even if you could find a cosigner with great credit and lock in a lower rate private loan, the perks of having a loan in just your name outweigh having a loan in the name of two people.

Cosigning a loan can be a huge risk.  Not only is it a major financial commitment, but it can put a huge strain on an existing relationship.  Can you imagine the stress of not finding a job and then learning that not only is it wrecking your credit score, but it is damaging your parent’s as well?

As a general rule of thumb, having a single person on the loan is almost always better.

3. You can always just refinance after you graduate

Here at the Student Loan Sherpa we are not huge fans of refinancing your federal debt into private loans.  In fact, we call it breaking the golden rule of student loan consolidation.

However, consolidating your federal loans into a private loan does make sense in certain circumstances.  This would be if you are 100% certain that you won’t be needing student loan forgiveness or an income based repayment plan.  If the only “perk” you need is a low interest rate, private loan consolidation may be for you.

By going this route you only pay interest at the federal rate for the time you are in school, the rest of the time you can get the low private loan rate.  This route is preferable to immediately picking private loans because it eliminates the risk of an uncertain job market.

By starting with federal loans and then eventually converting them to private loans, grads can realize the benefits of both options.  Consider the slightly higher interest rate paid during college to be a valuable insurance policy.


  • Private student loans are a last resort – after taking advantage of free money (scholarships) and federal lowns.

  • I can’t wait until mine are finally paid off. i have a long ways to go, but I get much better interest rates compared to my student loans that are through a private bank.