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Shop for a student loan that meets your needs at a reasonable cost as a way to help manage your future debt burden.
Your financial aid administrator can help you consider all of the important factors when comparing loan programs. |
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| Federal Direct Loans |
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The guidelines for these loans are established by the federal government and your lender in the U.S. Department of Education. You should always use federal loans before considering a private loan. The terms and conditions of federal student loans are more favorable and more flexible than those of private loans. |
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| What to Look for in a Private Loan |
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If you need to borrow a private loan, there are many things to consider. You should investigate the features of several private loans and prioritize which factors are the most important for you before making a choice. These include:
- Overall cost of the loan
- Credit criteria and approval rate
- Monthly payment
- Grace period, deferment, and forbearance
- Reputation of the lender, customer service, and other services
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| Overall Cost of the Student Loan |
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For some borrowers, the most important factor when choosing a private loan is the overall cost of the loan (the total amount it costs to borrow). Below are some of the things that contribute to the overall cost of the loan: |
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Notice how the interest rate is calculated. Most lenders charge an interest rate that is based on an index (such as the 91-day U.S. T-bill, LIBOR or Prime Rate) plus a per annum margin percentage. When comparing interest rates, research the current rate of the index being used and then add the per annum margin percentage to get an accurate comparison. (Visit www.bloomberg.com to find the current rates of a variety of indexes.)
It's always a good idea to find out what the average for the index has been over the past 10-15 years. It is also important to note if the interest is capped at a set maximum. Finally, you should know when and how frequently the interest is capitalized (when the interest is added to the principal of the loan). The more frequently interest is capitalized, the higher the overall cost of the student loan will be. |
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As with the federal student loans, there are several types of fees lenders can charge on private loans. When comparing overall loan costs, you should calculate the cost of the fees to get a fair comparison.
If the overall cost of the loan is the most important factor in choosing a loan program for you, be careful not to choose a loan with a low interest rate but high fees (or vice versa). The total cost of the loan is equal to the amount borrowed plus the interest and fees accrued. Calculate the dollar amounts of each and compare the costs. |
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| Credit Criteria and Approval Rate |
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Not all lenders extend credit to all applicants. Before you apply for a private loan, it is a good idea to investigate the lender's credit criteria and approval rate. You may find your options limited if you cannot meet the criteria set by the lender. You may also find that lenders who offer the lowest overall cost, do not have very high approval rates. |
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Some lenders may offer borrowers the option of using a creditworthy cosigner to increase the number of students eligible for private loans. These cosigned loans may not offer the lowest overall cost; however, they provide access to student loans for those who might not otherwise be able to qualify. Some lenders may also offer borrowers with good credit the option of using a cosigner to reduce the cost of the loan. |
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| Monthly Payment |
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For many borrowers, an affordable monthly payment is an important factor in choosing a loan. If you expect to borrow a lot of money to pay for school, be sure you can afford to repay that debt when you enter repayment. When estimating what your monthly payments will be, consider the length of repayment and any available repayment options. |
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Some loan programs offer longer repayment periods, which help borrowers with a large amount of debt afford their monthly payments. All other factors being equal, a longer repayment period reduces the monthly payment, but increases the overall cost of the loan due to the continued accrual of interest. |
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Investigate the repayment plans offered by each lender. Some lenders offer graduated repayment options which allow for interest only payments at first, or loan consolidation that allow you to make lower monthly payments. Also, some lenders may offer payment incentives on your private loans that reduce monthly payments. See the
Loan Repayment Calculator. |
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Grace Period, Deferment, and Forbearance
(visit glossary) |
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You may want to choose a loan program that offers a long grace period to ensure that you will have a job before you have to begin making monthly payments. Check to see if deferment and forbearance options are available.
If you are enrolled in a medical or dental program, you may need a loan that will allow you to defer repayment until after your residency program. Also, it may be a good idea to choose a private loan program that offers forbearance for economic hardship. |
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| Reputation of the Lender, Customer Service, and Other Services |
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Check with your financial aid office or other borrowers about their experience with each of the lenders you are considering. If you call to ask questions about the loan program, pay particular attention to the customer service staff that assists you. Also, you may find that certain lenders offer additional services that can be very valuable and convenient to you. |
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