In this topic, we cover:
- The advantages of Federal loans.
- When to consider a private education loan.
- How to choose a private loan lender.
Student loan choices can make a real difference in both cost and convenience. Federal loans usually have lower interest rates than private loans and also offer the most flexible repayment plans. There are loan forgiveness programs for federal loan, in which a portion of your loan is repaid at no cost to you, based on the work you do after college. Two popular forgiveness programs include Teacher Loan Forgiveness and Public Service Loan Forgiveness, though there are others.
That said, once federal loan limits are maxed out, private loans may be your only choice for attending a certain school. As long as you pick the right loan for the right reasons, accepting a private loan can be a sensible choice. For example, amassing tens of thousands of dollars in private loans may not be the best choice for someone pursuing in a modestly-paid profession.
You probably realize by now that a loan is something you will carry with you for quite a while - typically 10 years or more. That's why, for each and every loan, you should be sure to know the answers to each of the following questions:
- Is your loan a federal or an alternative (private) loan? Federal loans should be the first choice.
- What is the loan interest rate? Is it the same for every borrower? Private loan interest rates typically vary depending on the borrower and cosigner credit score.
- Will you be required to make loan payments or pay interest while you are enrolled? Paying interest while in school can be a good idea in the right situation, but ideally it should be an option, not a requirement.
- If you do not pay interest, how often will interest be capitalized or added to the remaining interest on your loan? The more frequent the capitalization, the more expensive the loan is likely to be (provided you are comparing with another loan with the same interest rate).
- Will the lender making your loan service it as well, or will your loan be sold or transferred for service once it is made? Who will your servicer be?
- How easy is it to access the lender and servicer by web, phone or in-person with questions? If you have questions, you need an easy way to get answers.
- At the time your loan is being made, are there any credits or fee waivers to save you money? If so, what are they and how do you qualify? Lenders often reduce interest rates after a certain number of payments, but "up-front" discounts are a sure thing.
- During repayment, are there ways to reduce your interest rate or principal if you make your payments on time or pay by automatic payment? If so, by how much?
- Are you guaranteed to keep the borrower benefits originally received on your loan as long as you continue to meet eligibility requirements? Is there a "universal default" clause in your agreement that allows a private lender to raise your interest rates if you fall behind on other, unrelated debt? Universal default is now illegal for credit cards, but not private student loans.
- What repayment options are available? Can loan repayment be deferred for graduate school?
- What will be the total cost of your loan if paid as agreed? In other words, if you make all the payments on time for the entire term of the loan (10 years, etc.), what will it cost? This is the "bottom line" price.
If you have sizable loans, even a one-quarter percentage point reduction will save you money over the life of the loan. Also, as you consider cost, remember, when interest is capitalized, you end up paying interest on your interest, as well as on the principal amount of the loan. Frequent capitalizations mean you pay more interest over the life of the loan. So an infrequently capitalized loan with a slightly higher interest rate may be cheaper than a more frequently capitalized loan with a lower interest rate. That's why knowing the "bottom line" price is so important.
When it is time to start repaying your education loan or loans, make sure you keep in touch with your loan servicer. It is your responsibility to pay your loans on time, even if you do not receive a bill.
If you encounter any difficulty making payments, contact your servicer immediately. You may be eligible for a more flexible repayment schedule or even a reduction or temporary break from making payments.
Another possibility for lowering your monthly payments is to consolidate your loans. A consolidation loan can put several loans together to give you one loan with a single rate and a longer repayment schedule. While loan consolidation could make it easier to manage your monthly payments, you may end up paying more over the life of your loan. Consolidating federal loans with a private loan may also result in the loss of valuable borrower benefits, including options such as income-based repayment and loan forgiveness - so review your options carefully.
