Evaluating Student Loan Options

 

 

Student Loan Lenders

 

Direct-to-consumer federal student loans are offered by the government through the Department of Education which serves as the lender.  Though Federal Family Education Loans for parents of students are also offered through the federal government, they are actually handled by government approved lending facilities.  

Lenders for private student loans can be banks, credit unions, higher education institutions, or specialized lenders.   Most of these institutions offer programs similar to federal student loans, however the terms often differ significantly.

 

Student Loan Interest Rates

 

A loan’s interest rate is always going to take top priority when looking at the terms.  This is where the federal student loans have an advantage over the private student loans.  The qualification for federal student loans is based on financial need, which has made it possible for the government to cap the interest rates and keep costs lower.

The current Direct Loan rates are fixed at:

• 5.6% of undergraduate loans
• 6.8% for graduate and unsubsidized loans
• 7.9% for PLUS Loans

This isn’t the case with private loans whose interest rate is connected to the fluctuating LIBOR and PRIME index rate and the borrower’s credit.  This translates into typically higher interest rates and overall higher expense for the loan. 

Interest rates for private loans also vary depending on whether the money is being school-channeled, or sent directly to the school.  If a loan isn’t school-channeled they almost always have a higher interest rate because of the added risk of not having a school involved. 

The interest rate is expressed in true form as the Annual Percentage Rate, or APR, which includes all fees associated with the interest.   This is the number to use when comparing lenders as this is the true reflection of the total cost of the loan.

 

Loan Fees

There are also a number of fees involved with making loans that many people don’t think about until they receive the disclosure statement with all the terms and conditions of the loan.  But these fees can definitely make a difference in the cost of a loan. 

Origination fees are a fee for administering and creating the loan and are typically 3% of the loan.  Another type of fee that is connected to both federal and private student loans is a 1% default fee used to protect the lender against borrowers who default. There can also be prepayment fees with private loans in which the borrower must pay a certain amount if they chose to pay the loan off early.

 

Consider the Student Loan Payment Options

 

Another thing to consider is what repayment options are available on the loan.  This can make all the difference in the world on if you can afford a loan or not.  Here again federal loans tend to have a leg up on private loans as they have more flexible repayment options and better forgiveness policies. 
Most all federal loans will offer:

• Standard monthly repayment plans
• Income contingent repayment plans
• Extended repayment plans
• Graduated repayment plans

Whether or not a private loan will have these options is a toss up dependent on the lending facility and the credit situation of the borrower.  These options have a great impact on how much your monthly payments will be and how much you can manipulate it to meet your needs. 

Other benefits of federal loans that might not be available with private loans include having no prepayment penalty, the ability to defer payments, being able to switch your method of repayment, and having a 6-9 month grace period after graduation where repayment doesn’t have to be made.

 

Why Customer Service and Credibility Matters

 

A few other factors that need to be involved in the decision making process is the customer service level of the lender, their ability to service the loan, and what discounts or borrower benefits they offer.  On a whole, federal student loans again offer better terms for students and their parents and because of this should be considered before looking into private student loans. 

You’ll also want to make sure that the lender is a credible one with a good track record. This isn’t an issue for federal loans that are provided by the Department of Education, however any other student loan provider needs to be researched first.

One of the easiest and quickest ways to measure a lender’s credibility is to look them up in the Better Business Bureau (BBB).  The BBB keeps track of how often a business has complaints and lawsuits brought against it among other telling factors. The internet is also a valuable research tool for finding customer reviews and seeing what people are really saying about the business.
Your personal contacts and school’s financial aid office are also great resources for finding a trusted lender.

 

Conclusion

 

Whatever financial route that a student and their family takes it’s important that it’s one they will be comfortable with because it will be a long term commitment.   There are many dangers in taking on debt that can’t be managed, and defaulting on a loan isn’t a good way to start your credit history.   Creating a budget, increasing income while in college to pay off debt, choosing the right loan program, and not borrowing more than needed are a few simple ways students can manage their loans.