Shopping for student loans is common over the summer months with schools sending out many billing statements before the fall semester begins.
Once students find out how much financial aid eligibility they have, they can calculate their total bill outstanding to know what they need to apply for.
In a recent post, I compare the Parent Plus loan and private loan features to help educate students and parents to better understand their options. If a private loan is an option that makes sense for your education financing needs, here are some additional items to look out for when comparing lenders and programs.
- Interest rate: The most recognizable aspect of private loans is the rate. Ideally, borrowers want the lowest rate available as this is an indicator of the cost of repayment. The interest rate assigned to an application will be based on a credit check. The stronger the applicant’s credit, the more likely a lower rate can be issued, and the lower the applicant’s credit, the higher the rate may be. Most private loans carry a variable rate where an underlying rate index like LIBOR or Prime is used to issue the loan. Additionally, there is a loan margin that represents the fixed portion of the loan rate which, when added to the index rate, equals the full interest rate. Margins on private loans can be as low as 2.99% or as high as 14% depending on the program, so take a look at what is out there to compare. The appeal of a variable loan is that borrowers with good credit may qualify for very low rates. However, rates on these loans may increase in the future, so if a borrower earns a low rate now it would make sense to pay it off as quickly as possible to mitigate the risk of future interest rate variability.Private loans carrying a fixed rate are less common, but may be available. A fixed rate on a loan can provide more predictability, but may also carry a higher rate, increasing the cost of interest during repayment.
- Payments while in school: Some private loans may allow the borrower to defer all payments while in school, while others may require a minimum payment to be made each month. Making payments on a private loan while in school is a good idea to help eliminate debt as quickly as possible. It also helps to build a better credit profile for the borrower by demonstrating good repayment habits over time. The option to defer all payments on a private loan while in school may be available. This offers convenience for the borrower because they would not be responsible for current payments, but more loan interest will accrue making it more expensive to repay.
- Repayment benefits: Look for ways to reduce the cost of repaying a private loan with interest rate reductions. Some loans allow a reduction in rate for setting up automatic payments, while others reduce the rate after a certain percentage of the loan is repaid. Verify the requirement and make sure to use this benefit to save some money on loan repayment.
- Co-signer release: If someone co-signs a private student loan, there may or may not be options for the co-signer to be released. This can be a challenging situation for co-signers as they may like to be removed from the obligation at a future date. Confirm if the lender provides a co-signer release option, and if so, how long does it take and what is required to earn this benefit.
- Years of the term: This is the number of years scheduled into the repayment of the loan. Terms on private student loans can vary from 10 years to 25 years. The rule of thumb on loan terms is that the longer the term, the lower the minimum monthly payment. However, the longer it takes to pay off a loan, the more interest can potentially accrue on the account.
- Prepayment penalties: A prepayment penalty is a fee charged a borrower if they pay their loan off ahead of the scheduled repayment term. Lenders asses this fee to borrowers to secure earnings in the event the borrower pays off the loan too quickly preventing future interest revenues. This is an important consideration for motivated borrowers who want to get out of debt quickly because their efforts to save money could be stymied by these fees. Ideally, a borrower would not want to be responsible for prepayment penalties, but lenders may charge them, so look for an answer to this important question during the application process.