College is the first major financial decision many young adults make; the amount a student borrows and the interest rate they agree to could impact their finances for the rest of your adult life. Student loans aren’t all bad though- they provide a way to better oneself and get access to education for those who don’t have enough family savings or scholarships to fall back on.
Students get into financial trouble when they don’t analyze the total amount of student loans they have relative to the potential salary they may earn upon graduation.
The general rule of thumb is for a student to not have TOTAL loan amounts that are greater than their first year of salary.
It may seem hard for high school students to estimate what they might earn when they graduate college, but now is the time to start estimating – before taking out loans they may have trouble paying back. Families should consult Payscale.com and The Bureau of Labor Statistics to help estimate what graduating salaries will be in professions a student is interested in. This is also the perfect time to make sure teens and young adults understand important, basic concepts of financial literacy (such as compounding, interest rates, and grace periods) as they begin to undertake research for finding student loans.
The average student takes out nearly $30,000 in student loans over four years. With an interest rate of 9% annually, a student can expect to pay nearly $15,700 in interest over ten years, if it took them ten years to pay off the loan. That is a lot of money in interest, over half of the original amount borrowed. This is why the #1 thing you can do to save money on your student loans and promise a financially bright future is to shop and compare interest rates on your student loans before you sign on the dotted line.
Ways to Competitively Shop for a Loan
Most students are used to the traditional big banks such as Sallie Mae and Wells Fargo providing loan options, but bigger isn’t always better. In today’s economy considering non-traditional lenders can mean big savings. Credit unions and smaller lenders, like LendKey, can provide better customer service and cheaper rates than many of the big guys, and often come with additional perks such as a close community of borrowers and one-on-one counseling.
Students can also get creative when it comes to shopping for education financing, such as using peer-to-peer and crowding lending sites. New technology, like Achieve Lending’s student loan search engine and comparison tool also allows students to competitively shop interest rates between private lenders with ease.
Why Shopping for Interest Rates is Valuable
Say that by shopping for private loans you got an interest rate from a lender of 7%, which is competitive given that the federal rate is 6.8% currently. The same borrower who took out $30,000 at 7% interest annually would pay $11,800 over ten years, with a monthly payment of $350. That is a savings of close to $1000 each year, or for those interested in a lower monthly payment, a monthly savings of $30, or $360 each year.
If a student were to take that extra $30 each month and apply it to their student loan balance, they’d be able to pay off the debt in 8.8 years (as opposed to 10) and save an additional $1,384 in interest.
Students are always encouraged to shop for interest rates and get the total picture before signing on a loan. As you can see, shopping for interest rates not only saves you money over the lifetime of the loan, but if you use the extra cash wisely, interest rate shopping can help you pay off debt faster.
Allen Kors is the founder and CEO of Achieve Lending, the first ever search engine for private student loans. With Achieve Lending students can shop, compare, and choose between lenders and interest rates, often in as little as thirty seconds.
Other Road2College articles to review:
Before considering private student loans make sure you fill out the FAFSA and don’t leave any money on the table.