This post is a guest post by Nate Matherson, Co-founder of LendEDU, and ’16 college graduate. Nate has repaid tens of thousands in student debt since graduation.
Borrowing money for school is necessary for most students, but the process can be complicated since you have lots of options available. You don’t want to borrow more than necessary or pay more than you should to fund your education, so you should shop around, get several rate quotes, and compare lenders carefully.
When you’re comparing lenders, it’s important to know what to look for. Here are some tips to help:
1. Always Max Out Federal Student Loans First
The first thing to know about taking out student loans is that you should always get as much money as you can from federal student loans first. There are lots of reasons maxing out federal loans makes sense including the following:
Credit and income don’t matter: For most federal student loans, eligibility isn’t based on your income or credit score. That makes it much easier for young people who are going to school to get a loan without needing a cosigner.
Interest rates are low and fixed: Everyone who gets a federal loan within the same time period will pay the same interest rate. This rate is usually lower than you could qualify for with private student loans and you don’t have to worry about the rate changing over time as you would if you took a variable rate private loan.
You have repayment flexibility: You can change your payment plan as needed, can opt for a plan where your payments are capped at a percentage of your income, and you have many options to put loans into deferment or forbearance if you need to temporarily pause payments.
Some interest may be subsidized. With Direct Subsidized loans, you can get your interest costs paid for by the government while you’re still in school or if you qualify for a deferment after you’ve graduated.
You can qualify for forgiveness. It’s possible you won’t have to pay back your full loan if you make enough payments on an income-based repayment plan and/or if you work in public service.
The one exception to the general rule that you should always max out federal student loans is federal PLUS Loans, which are available to grad students and parents of dependent undergrads. You can’t qualify for these loans with adverse credit, interest rates are higher than with other kinds of federal loans, and there are higher origination fees. You should compare PLUS Loan rates with private loans to see which loan is the better deal.
2. Picking the Best Private Student Loan
Once you’ve maxed out your federal loans, there’s a chance you may need to borrow more money from private lenders. Finding the right private student loan provider is trickier because there is a lot more variation from one lender to the next. To find the best private lender:
Get quotes from at least three different lenders: You need to comparison shop to make sure you’re being offered the best deal.
Read unbiased reviews from trusted sources: LendEDU, for example, ranks private student loan lenders by assigning weighted averages to key metrics for each lender. You can find lenders that have reasonable interest rates and have ranked very well in terms of customer service by checking out our ratings.
Understand qualifying requirements: Private lenders have different rules for credit and income to qualify for loans.
Look into loans offering cosigner release: Many young people will need a cosigner when borrowing from a private lender. The cosigner takes on a lot of risk by sharing responsibility for debt repayment. Some private lenders like Sallie Mae, College Ave Student Loans, and Ascent allow the cosigner to be released after a certain number of on-time payments, so look for these lenders.
Compare interest rates, origination fees, and other costs: You’ll want to find a lender offering a loan at a reasonable rate with no origination fee or a low origination fee and with no prepayment penalties if you want to pay off your loans early.
Understand fixed versus variable rate loans. While variable rate loans typically have lower interest rates to start out with, the rate is tied to a financial index and both the rate and payment could rise.
Compare repayment terms. Some lenders offer more flexibility than others in how long you have to repay your loans. Loans with shorter repayment timelines typically cost less over time but have higher monthly payments, so you’ll need a lender with a loan term that works for you.
Find out about options for forbearance. You need to know what circumstances, if any, would allow you to pause payments. This is important if you may want to go back to school in the future or if you worry about making loan payments if you end up unemployed for a time.
3. Compare Loan Options Carefully
Comparing all your options carefully is essential when you’re looking for a student loan. Remember, max out federal loans first and then shop around among different private lenders to find an affordable loan with the features you’re looking for. You’ll be paying your loans back over a long time, so finding the right lender is worth the effort.
Read More: Can You Get Personal Loans With Bad Credit?
Thanks for reading!
Let’s chat about Student Loans in the comments below.
Some questions for you:
What’s your best tip to pick student loans?
Do you think student loans are worth it?