Student Loan Smarts: Choose the Right Loan Option
BIG Ideas:
- Federal and private loans can provide the money students and parents need to pay for college.
- Federal loans are offered by the federal government while private loans are credit-based and available through banks, credit unions, and non-profits.
- To determine the loan that’s right for you consider the amount you need to borrow, fees, and repayment options.
As Goldilocks taught us, life is full of choices. That’s certainly true when it comes to college loans. From Stafford loans to Parent PLUS loans to private loans, you definitely have student loan options. But how do you channel your inner Goldilocks and find the one that’s just right for you?
Well, before you can answer that question, you need to first understand the two types of student loans available: federal loans vs. private loans. As the name implies, federal loans are offered by the federal government while private loans are offered by private institutions, such as banks, credit unions, state agencies, and non-profits (like Brazos).
The main difference between the two is that federal loans are often need-based with limited credit or income checks while private loans are based on the creditworthiness and income of borrowers.
To choose the student loan option that’s right for you, you need to answer some key questions:
How much do you need to borrow?
Once you receive your financial aid award letter you should have a good idea of the amount you need to borrow. Federal loans have limits on the amounts students can borrow and as a result, many students and parents have to turn to private lenders to bridge the gap where financing leaves off. Many private lenders, including Brazos, will let you borrow up to 100% of school certified expenses less any financial aid received, which includes scholarships, grants, and the like.
What are the interest rates?
In general, federal loans offer interest rates that are available to all qualified borrowers, regardless of their income or creditworthiness. In contrast, private loans are credit and income based, so the interest rate you receive and whether you even qualify will depend on your credit.
Is the rate fixed or variable?
Student loans may offer fixed or variable rates. With a fixed rate, your interest rate will stay the same for the life of the loan, making budgeting easier. In contrast, a variable-rate loan is tied to an index, such as the Secured Overnight Financing Rate (SOFR) and as a result, may rise or fall depending on the index.
Because they offer predictable payments, fixed rates are often priced higher. Federal loans offer fixed rates while private lenders may offer a choice of variable or fixed rates. The decision to choose a fixed or variable rate private loan depends on the rate environment, your budget, and your comfort with having a rate that could rise.
As you compare lenders, make sure you factor in interest rates and look at the total cost of interest you’ll pay over the life of the loan.
What are the fees?
A lot of things in life come with fees. Unfortunately, that’s true of student loans. Fees may include application, origination, prepayment, and late payment costs and will vary from loan to loan and lender to lender.
Federal loans come with an upfront origination fee that is taken from the loan proceeds to help defray the costs of borrowers who default on loans. These fees can be run from 1% to more than 4% of the balance of the loan, which can take a real bite out of your loan proceeds.
Private loans usually do not come with fees, allowing you to use the full loan proceeds to meet the cost of college. Pre-payment fees are usually not assessed, but late payment fees can really add up. Before choosing a loan, make sure you know all the fees involved – and make sure you are comfortable with the repayment schedule.
What is the repayment term?
Another important thing to know is the time you have to pay back the loan. Federal loans and most private lenders offer deferred repayment, which means you won’t have to pay back the loan until the student graduates or withdraws from school. Generally, you will always have the option to pay your student loan back sooner.
One advantage of federal student loans is that they can offer income-driven repayment plans that can reduce your monthly payments in the event that you’re having difficulty paying back your loan. Private lenders usually don’t offer this feature. Learn more about repayment plans.
What is the total cost of your loan?
Now that you know the interest rate and fees associated with your loan, make sure you know the total cost of your loan. The Brazos student loan calculator will help you compare your cost based on different terms.
Do you need a cosigner?
Having a co-signer on a private student loan could not only help you get approved for a loan but also help you get a lower rate. If you do get or become a co-signer, just remember that co-signing a loan is a big responsibility.
What will be your post-graduation income?
You may not have a crystal ball to see into the future, but it really helps to understand the income you might have after graduation. That will depend in large part on the field of study. Make sure you understand average starting salaries to ensure you’ll earn the income required to pay back what you borrow.
If your field of study can’t support your borrowing needs, you may want to consider other student loan options or even ways to reduce your college costs, such as commuting or looking for scholarships. Unfortunately, a large number of graduates suffer from debt regret when they realize they can’t afford their student loan payments.
So make sure you have the “money talk” about how your family will pay for college. Thinking about life after graduation now will help ensure that doesn’t happen to you.
We can make one decision easier – where to go for a private loan
For more than 40 years, Brazos Higher Education has been helping make education more affordable for students and parents. As a Texas non-profit, we can offer you BIG savings on various student loans. Contact us today!
