How to Find the Best College Loans
Shopping for college student loans is more important than ever especially since the cost of tuition has steadily outpaced the rate of inflation and grants now comprise less than 25 percent of financial assistance. Unfortunately, when it comes to finding the best college loans, parents and students often make the mistake of thinking that all loans are equal.
While it is true the government is responsible for establishing the interest rate for federal college student loans, the repayment options and terms are set by the lender. Private loans have full discretion in all aspects of the loans they issue. Even among federal loans the variations can make a tremendous difference in how much is paid over the life of the loan so it pays to compare. Begin your search by using these quick tips:
- Make a list of lenders. If you are a college student then focus on the state where you will attend college; parents should focus their search on the state where they reside.
- Subsidized or un-subsidized loans. Whenever possible it is typically wiser to opt for a subsidized loan rather than an unsubsidized loan. Subsidized loans are underwritten by the government so that no payments are required until graduation. Unsubsidized loans can also delay repayment until graduation but (and this is a big “but”) interest begins to accrue. Borrowers can pay only the interest or have it “capitalized’ or added back to the principle of the loan to be re-paid at a later date.
- Federal versus Private. In most cases federal loans offer better terms than private loans – but not always. Take time to carefully compare and read the fine print to decide which best suites your situation. Popular federal loans include PLUS loans and Stafford Loans.
- Compare origination fees. Some lenders offer lower origination fees or origination fee forgiveness programs for timely repayment. Graduate students, those attending private colleges or others with large student loan debt could recognize hundreds, or even thousands, of dollars in savings by an origination fee forgiveness policy.
- Automatic/Electronic transfer discounts. Lenders frequently promote automatic or electronic payment features by offering up to a quarter .25 percent interest rate reduction.
- Long term rate deductions. Timely payments may also qualify for interest rate discounts after making on time payment for the first two to four years.
- Capitalization terms. One of the most important considerations is to carefully check the capitalization terms especially for those taking out an unsubsidized loan. If the lender capitalizes interest more than once then you begin to pay interest on top of interest leading to a situation where the total amount of the loan is far greater than the original amount borrowed.
- Don’t Rely on Financial Aid Counselors Alone. Sadly, millions of student loan borrowers found their trust was misplaced when a large scale audit of financial aid officers and advisors throughout the country indicated kick-backs and other irregularities. “Incentive” rewards ranging from trips to tickets and dubious practices designed to promote a given loan, in spite of the best options for student needs, were found to be commonplace in many colleges across the nation. Until stronger legislation and oversight is imposed, parents and students are advised to take matters into their own hands when comparing the best college loan options for their individual situation.
- Read the fine print. The rate you applied for or were quoted isn’t always the rate you will receive. Many companies list the “best case” rates reserved for a small minority of applicants. Also, just because you don’t qualify with one lender don’t assume you won’t with others. Each underwriter has their own guidelines which may benefit you more in one setting than another.
- Off List and Online. Most colleges have “preferred lists” but those are simply the loans the college typically works with. Don’t limit your choice of lenders – instead, conduct an online search to find the best college loans rather than those most convenient for the college. It could save you thousands of dollars over the life of the loan!
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