 |
Your Student Loan -
|
Your Student loan is accessible and easy, right ?
The interest rates and fees on federal loans are capped by the U.S. government.
And these types of loans represent the vast majority.
So what complicates the loan process ?
It's perhaps the typical sales and marketing efforts of lenders and the inability of borrowers to decipher the process.
Lenders typically offer various interest rate discounts and rebates on fees and principal.
This smorgasboard of options makes it nearly impossible for parents or college students to conduct a side-by-side comparison of the best student loan option.
It's not surprising then, that many colleges maintain a "preferred lender list" because they can't always figure out the optimum comparison process either.
But, they have established relationships with certain lenders over the years... so, they maintain lists of lenders offering a student-loan portfolio... and suggest these are among the best deals.
Be careful ! These may be the best student loans avaiable but recent legislation has taken a shot at these practices because in some cases, colleges or financial aid officers were reported to have taken rebates for loan referrals.
The New York Attorney General's office negotiated agreements with dozens of schools to return these " student loan " lender paid fees to students.
Devise a Strategy
There are good deals but you have to know how to look for the best student loan. First things first. Complete the required loan paperwork and begin with the Free Application for Federal Student Aid (FAFSA).
You may think you don't qualify for aid but please fill this form out anyway because it's a requirement for certain other government backed student loans.
Student Stafford Loans carry the lowest interest rate, a maximum of 6.8%. Parents may use the government sponsored PLUS loan that currently has an interest rate of 8.5%.
In addition to the low interest rate advantages, these two loans are appealing for other reasons. Anyone can qualify, regardless of income. And down the road... borrowers can request repayments be suspended or reduced if they encounter financial hardships.
The Stafford Loan allows freshman to borrow $3,500... another $4,500 in their sophomore year, then $5,500 annually thereafter, for a total of $23,000. A student-loan with interest rate charges this low is rare, therefore students typically borrow the full amount.
The PLUS loan for parents is next if additional tuition costs, room, board and other fees need to be covered.
There are additional options with private loans if more than what parents can contribute or borrow is needed.
Many lenders offer private student loans (Sallie Mae, Citibank) with interest rate charges in the 8% to 18% range and add-on fees as high as 11.5%.
The interest rate payments for these private loans are higher than the alternatives available to parents so be sure to remember Mother's Day and Father's Day.
One option worth exploring is having the parents negotiate the lower rates with a PLUS or home-equity loan... Then work out an option that the student agrees to pay these loans back.
Time to Compare
Most Stafford and PLUS student loans offer discount features. At least one of three types may be available:
These discounts can result in lower payments so some general guidelines ought to be considered. It's generally more advantageous to choose the discounts that start early in the life of a student loan and can't be canceled.
These types of discounts include fee waivers and automatic interest rate cuts for agreeing to sign up for direct payments.
Remember as you do your comparisons... that interest rate reductions are usually more advantageous than fee waivers or principal rebates.
And... discounts based on good payment behavior for certain periods of time are less valuable.
Before you sign - be sure you've read the fine print. You don't want to lose your loan benefits or be forced to repay any discounts if your lender sells your loan or if you decide to consolidate your loan with another lender.
And Finally
A student loan is necessary... and if you have no choice other than a private loan, don't always pick the lender who advertises the lowest rate.
A student loan is like other loans. The payment will be determined by the borrower's credit score. So, typically students will be ahead of the game if a parent co-signs.
And, as you consider the options for a student loan... check with the school financial aid office for recommendations or special deals that may be in place.
And to compare rates, apply to more than one lender.
