Private unsubsidized student loans a better deal than fed loans

An unusual wrinkle in the student loan marketplace has me temporarily reversing one of the staples of my longtime advice. It might be a better idea right now to take out a private unsubsidized student loan than a federal unsubsidized student loan.

Particularly for people enrolled in the summer semester or the coming fall term, Smart Money  magazine reports that for the first time in history, it is possible to find a lower fixed rate on an unsubsidized student loan from a private lender than you would get under the federal student loan program for unsubsidized student loans.

The rates for federal unsubsidized student loans are set by Congressional statute at 6.8%. But in the private marketplace, you’re apt to find 5.7% or 5.8% from private lenders for fixed rate student loans. (This advice does not apply to variable rate student loans; those are still poison for your pocketbook as always!)

What’s behind this unusual temporary circumstance? With interest rates being manipulated by the Federal Reserve, that effect filters throughout all kinds of lending products. That’s why you see credit unions doing four-year auto loans at 1% or something ridiculously low like that for people with great credit. Every part of borrowing except for credit cards is a steal.

So this is a very temporary pivot on my part. As soon as the Federal Reserve stops its interest rate manipulation, my advice will revert back to what it’s always been about federal student loans trumping private ones. But for right now, banks need some place to lend all their money and the student loan market gets the tangential benefit of that.