Comparing Student Loans

By: Bryan Lee, UHEAA

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Attending college is an investment in your future success. There are a lot of options to help pay for college. You can use grants, scholarships, work study and even student loans. When comparing student loans there’s a lot to think about. We’ve put together these six questions for you to ask when applying for student loans.

How much do I need to borrow?

Before you start comparing student loans find out how much you need to borrow for college. You should use all the financial aid you don’t have to repay first – this is usually called Gift Aid and can include grants, scholarships and work-study. When you receive your financial aid award letter from your college’s financial aid office you’ll see the amount of financial aid they can give you and the amount you may still be responsible for. Part of your award will include the amount of federal student loans you can qualify for. Click here to find out more about federal student loans. Any additional amount is the amount you’re responsible for.

What type of aid can I use?

Once you’ve used your federal financial aid you can think about how you’re going to pay the rest of your college expenses. Private student loans can help close the gap. When comparing student loans, many lenders will have multiple student loan types to choose from. Some of them get very specific. You have to know which program you’re in, how many years you have left in school and a number of other things.

What is the interest rate and how does it affect my loan? 

The interest rate is the amount you have to pay to borrow money, which affects the total cost of your loan. Generally, you will see two types of interest rates—fixed and variable. Make sure you understand the difference between the two types interest rates are one of the most important aspects of a loan.

Fixed interest rates do not change over time. You know what your interest rate will be month-to-month. If you’re looking for a loan payment that doesn’t change, then fixed interest rates may work for you.

Variable interest rates change at set intervals, it could be every month or every year. Typically, a variable interest rate changes because it is pegged (connected) to an index that changes like the London Interbank Offer Rate (LIBOR) or the Prime Rate. LIBOR is the rate banks charge each other to borrow and is used across the world. The Prime Rate is the rate banks charge a “perfect customer” and is based on the Federal Funds rate.

Some lenders determine your interest rates based on your credit score or your cosigners credit score. So you might see a range instead of a single interest rate—for example, 3.66% – 10.56%. But don’t worry, this isn’t always true, lenders like Complete Student Loans have one fixed interest rate for all customers who qualify.

What kind of fees, discounts or benefits are associated with the loan?

Each lender has different fees, borrower benefits and loan discounts on their student loan programs. Make sure to carefully consider those factors to determine the best loan program for you. Take care when you compare these factors, because every dollar counts.

Understand the different dollar amounts charged for fees such as—origination fees, return check fees, and late charges.

Analyze each lender’s benefits such as—grace periods, on-time payment benefits, and autopay reductions.

Can I defer payments on my loan if I need to? 

If you run into financial difficulty, you may need the flexibility to postpone your payments for a while. Does your lender allow you to defer payments? How long can you defer payments? What happens to interest that accrues during deferment periods? Each lender sets its own rules when it comes to deferring payments, having a flexible deferment plan is like having insurance: you hope you never have to use it but, if you do, it’s there.

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What repayment plans are available? 

Some lenders ask their borrowers to make monthly payment while the borrower is still at school. While other lenders don’t require their borrowers to make payments while they’re in school. Making payments while in school is a good way to get in the habit of repaying your loan.

Look closely at the repayment terms. You may have the option to make your payments over a longer period of time with a lower monthly payment, but remember this general rule: the longer you take to repay your loan the more interest you will pay. In addition, explore the lender’s deferment options, loan forgiveness programs, and cancellation and discharge policies. Be sure to choose a student loan lender that provides you the most flexibility to ensure your monthly payments are manageable.

Comparing Student Loans

When you compare student loans remember these questions. Also, make sure you only borrow what you need and only from a lender that allows you to pay back your loan in a way that works for you.