Paying for college with student loans is often frowned upon, due to the stigma of student loan debt being a growing problem in the United States.
However, using student loans to pay for college isn't always a bad thing. If all the precautions are taken and every avenue is explored, taking out a student loan can be an incredibly financially savvy move. College is an investment after all, and investments don't come free of charge.
Our goal is to make sure you ask the right questions and check the right boxes before you sign on the dotted line of your loan application. That way you'll know exactly what your repayment will look like after college with no surprises 6 months after your diploma is handed to you.
Let's dive into 5 key things you should know when comparing student loan lenders so you make the right decision for you. But first...
It seems like it's not as simple as just choosing between lenders. There are also federal and private student loans to think about. Our rule of thumb is to always take out federal student loans first.
These offer the most security and the lowest interest rates, here's why:
It's common for federal loans to come up short of what your actual tuition might cost, as these types of loans are determined by you and your family's financial need. Don't fret just yet, that's where private student loans can help.
Now that you have gotten federal student loans to help pay your tuition, it's time to turn to private student loans. Knowing the the different between the two will help you understand why this is your next best option to pay your bill.
With private student loans comes a responsibility that you keep your best financial interest in mind. Always remember that you are your own self-advocate in a big financial process like this.
That's why it's important to not accept just any lenders offer, do your research and follow these 5 steps to get the best deal you can.
1. Know the interest rates inside and out
The biggest difference across private student loan lenders is that they offer all different interest rates, and most give you the option to choose between variable- and fixed-rate loans.
You'll notice that variable-rates tend to be lower than fixed-rate loans. Variable-rate loans can change over time depending on the market. If the interest rates rise, so will your payment and vice-versa.
Fixed-rate loans, like federal loans, remain constant over the life of the loan. The only time the interest rate can ever change is if you refinance your private student loans with a new lender at a lower interest rate
Sallie Mae is a great example, their fixed-interest rate starts at 4.74%, which is much higher than their variable-rate of 1.25%.
It seems like an obvious choice, but keep in mind that a higher interest rate can make a substantial difference in the repayment terms of your loan. Rather than just choosing the lowest rate, look at the whole picture when making this decision to avoid surprises and rates that will extend the life of your loan longer than you anticipate.
Term length can make a very large difference in how much your payments are and how much interest you'll pay over time, which is why this should be looked at just as closely as interest rates.
In general, if you have a shorter repayment period, you will have higher monthly payments but pay less interest.
Conversely, if you have a longer repayment period, you will have lower monthly payments but pay more interest.
What you ultimately decide depends on many things, including your anticipated starting salary and any other bills and financial responsibilities you might have.
Most students opt to have a cosigner on their student loan application because they typically don't have good credit or a steady income.
Having a cosigner means you have someone agree that they are responsible if you can't pay your loan. If you miss a payment, this person will be held responsible that the loan is paid.
This is why you should choose someone that you financially trust, but also someone that financially trusts you.
The benefit of having a cosigner is you often can get approved for a lower interest rate depending on their credit score. You also will have more options as many lenders require a cosigner if you don't have good credit or a credit score at all.
At some point, you might want to free the cosigner from your debt and you can do this a couple of ways:
Pay attention to what the lender offers for cosigner options if this is important to you and your cosigner.
Why would you want to repay your student loan while you're still in school?
There are a few reasons why this can be beneficial:
Different lenders offer different repayment options while in-school if this is something that interests your financial plans. These options are quite common, so make sure you check with each lender to see if they offer them:
Origination fees aren't all that common across student loan lenders, neither are prepayment penalties, but it doesn't hurt to double-check.
An origination fee is an initial charge by the lender when you enter the loan agreement as a means of processing the loan.
A prepayment penalty is a fee charged if you pay off the whole loan or part of the loan early, before the intended loan end date.
Overall, let this be a reminder to you to always read the fine print when signing off on any financial decision. There's nothing worse than getting hit with penalties and fees that were clearly outlined in the terms and conditions you didn't take the time to read.
It's always important to understand your personal financial situation in full before you make a decision as big as taking out thousands of dollars in student loans. Although college is a great investment, if you aren't sure it's worth it, take the time to do all your research and know what you're getting into.
Not all lenders and student loans are created equal, so keeping these 5 key things in mind is going to guide you to make a more informed decision about your investment in college, especially after the fact when you have to pay it off.