Paying for college can be an intimidating prospect, but there are a lot of options available that can help. Once your student has applied for all the scholarships and merit aid available, it’s time to consider other options for student loans.
Because federal school loans have favorable policies, including lower interest rates, subsidized interest during school, and more, it’s a good idea to maximize those first. If your student still has financial needs, you may need to look at the private student loan market.
The Importance of Researching and Comparing Private Student Loans
While federal loans are standard and uniform, private loans vary a great deal. It’s extremely important to look at a variety of factors and to get information from more than one lender. When you have the information in your hands, you have the power to make the best decision for your family.
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Differences in Student Loan Fees and Interest Rates
Each private lender will have their own “fine print” that describes the fees and interest rates involved in borrowing from them. Some of the terms to look for include:
- Origination fees. These are fees that the lender charges to set up the loan, and are not part of the amount borrowed. If possible, find a lender that does not charge an origination fee.
- Fixed interest rates. A fixed interest rate does not change over the life of the loan. When you have a fixed rate, you know exactly how much interest you will pay each month and year.
- Variable interest rates. A variable interest rate is composed of two parts – the margin, which is a set amount the lender charges, and the index, such as the federal prime rate. While the margin remains the same, the index can go up and down, changing the amount of the payment. You’ll want to make sure you understand how often the payment amount can be changed – it could be monthly, quarterly, or annually
Finding out your interest rates from multiple lenders, without filling out multiple applications, gives families the information they need to make a more informed decision. Currently, the only marketplace that can give borrowers that information is CREDIBLE, an online marketplace that provides borrowers with competitive, personalized loan offers from multiple, vetted lenders.
Watch our FB Live with Credible to find out more about how borrowers are prequalified with multiple lenders.
Comparing lenders based on interest rates and fees is the first step, but there is more to consider as well.
Differences in Terms and Conditions
The terms and conditions cover a wide variety of circumstances that may occur while you repay the loan. It also involves the duration of the loan and what payment options you have.
- Duration of the loan. How long will you be paying the loan back? How does that compare to you or your student’s expected income and future plans?
- Handling interest during school. Unlike federal subsidized loans, interest on private student loans accrues immediately. Sometimes it’s added to the loan amount right away, and sometimes the borrower can make interest-only payments while the student is in school.
- Payment arrangements. Some lenders can defer payments so that the borrower doesn’t start paying until the student finishes school. Other times the borrower is expected to start monthly payments immediately.
- Policies for tragic situations. If the student or borrower is disabled or killed, what happens to the loan? Some lenders allow for loan forgiveness, and others do not. It pays to know, ahead of time, the different policies lenders have to cover these unfortunate situations.
What Matters to You?
Your family situation, credit, and income will all impact which of these concerns matter most to you. Doing the research and finding out what you need to know about all your student loan options will put you in a position to make the best decision for your family.
Understanding Cosigning on Student Loans
Sometimes, due to lack of credit or low income, a student cannot qualify for a private loan on their own. They may need a cosigner. Before you agree to cosign on a student’s loan, be sure that you understand the obligation.
A cosigner is someone who agrees to take responsibility for a loan along with the original borrower. If the borrower cannot make payments, the cosigner will be expected to step in and do so. If you cosign on a loan, your credit history will be part of the loan decision, which can help the student get approved or get a better interest rate. However, the loan will show up on your credit report as a financial obligation, even if the student is making the payment.
It’s important to take a long-term view when making cosigning decisions. If you have multiple children and you cosign for one of them, is the loan so large that you won’t be able to cosign in the future for the others? Keep in mind that the expenses from a cosigned loan can impact the ability to get approved for future credit, including future cosigned loans.
Some lenders allow a cosigner to be removed after a certain number of timely payments. You may want to look for this in any loan you choose to cosign. The borrower can contact the lender after the payments are made and other conditions are met and request that the cosigner be removed from the loan. Once the lender agrees to release the cosigner, the loan will not impact that individual’s credit anymore.
Find the Information You Need
The idea of going to multiple lenders and trying to find out all this information can be overwhelming. Fortunately, there are services that make it easier. For example, Credible is a service that allows borrowers to pre-qualify for loans and compare the results side by side. These types of services allow clarity and transparency as you research and compare student loans.
A pre-qualification with Credible does not impact your credit, and it does not pass information on to the lenders until you agree to move forward. It can be a great way to play with different scenarios and fully understand the impact of loans.
Paying for college is a complex process, and it’s essential to make the power of information work for you. Don’t walk into a private loan blindly. Instead, ask questions, compare lenders, and get the information you need to make the best possible decision for your student.
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Debbie Schwartz is a former financial services executive with experience marketing investment, credit card and student loan products. She is also the founder of Road2College, the go-to site offering families unbiased and transparent information to help parents and students become educated consumers of higher ed.