Blog

Best Practices: Assessing Your Student Loan Options

Posted by Lindie Johnson on May 16, 2016 3:45:00 PM

If you are a parent of a soon-to-be college student, then you likely just paid a deposit for next year at your student's college of choice. It's exciting and stressful and you may be wondering how you are going to pay that tuition bill this fall. If you are like most families, you may have received some financial aid from the school after submitting a FAFSA. However, you are not alone if you are still left with a considerable bill to pay. 

If you have paid all you can from savings and taken advantage of scholarships and grants, your next step may be to look into your student loan options. 

What's the Most Popular Student Loan?

Stafford loans (now often referred to as Direct Subsidized and Unsubsidized Student Loans) are the most popular student loans because they can be used by both undergraduates or graduates enrolled at least a half-time and you don't need to demonstrate financial need to make use of the program (although doing so will help reduce your interest costs).

iStock_000056966172_Small.jpg

You still want to take advantage of as much grant and scholarship money as possible, but if your family needs to borrow on top of any free money awarded, this is one of the best options out there for students due to the competitive interest rates and extreme repayment flexibility.

What's the Interest Rate?

Interest rates are fixed on federal student loans and are set annually in May. Interest rates can vary widely on non-federal loans so it is important to pay attention to the rate before (and after, since many programs base your rate on your credit score!) applying.

The interest rate on federal education loans can vary from year-to-year but it is typically within the range of 4-7% with direct subsidized loans typically having the lowest interest rates and direct PLUS loans having comparatively higher interest rates.

With non-federal loans, the rate is based on loan program and/or your credit and other factors: all the more reason to start cultivating great credit early on!

Can Interest Rates Change?

When it comes to student loans, there are essentially two types: fixed-rate and variable-rate.

The latter is sometimes called a student loan with a "floating" interest rate because the interest rate can alter or "float" based on market benchmarks like the monthly LIBOR. Variable interest rates can potentially be a scary proposition since when rates change, so do your monthly payments. Interest rates are incredibly low right now so if you can tolerate some level of risk and if you have some flexibility in your budget to support changing monthly payments, it could be to your advantage to go with a variable-rate student loan.

Fixed rates, on the other hand, are considered the more predictable option. If market rates rise, your monthly payment remains the same. While the upfront rate may seem comparatively high to those on variable rate loans, there could be payoff in the long run if rates rise.

What are Student Loan Fees?

There are a few fees that students and parents should stay abreast of before taking out student loans.

Origination fees or disbursement fees, for instance, are fees that a lender can charge for processing the loan.  Many loan programs now offer no upfront fees, but be sure to ask the question before you sign the note! Federal PLUS loans typically have an origination fee of a little more than 4%, currently 4.272%.

In addition to upfront fees, the lender may charge back-end fees such as late fees, returned check fees, or collection fees but these only occur of you break your end of the agreement and don't pay on time or at all. 

Repayment Flexibility

To determine how much repayment flexibility you need, you should first agree on who will be borrowing the loan - the student, the parent, or both - and who will primarily be responsible for making payments. Parents usually can tolerate a little less repayment flexibility than their children, who have the uncertainty of post-graduation employment to contend with. Federal student loans provide a tremendous amount of repayment flexibility to students, including deferment options, forbearance periods, and several income-driven repayment programs. 

Parent PLUS Loans and non-federal student loans, however, don't offer quite the same benefits. Be sure to ask the lender about what programs are available before applying. 

Benefits

Lastly, when doing a proper loan comparison, you'll want to look into benefits of the program. Is there a rate discount for making automatic payments, and are you likely to take advantage of it? Are there any loan forgiveness programs or repayment rewards? Ask the questions, be honest with yourself on whether or not you are likely to qualify for the benefits, and use them as a final tool to compare education loans and figure out what the best deal is for your family. 

 Need some assistance comparing your options? Book a free appointment with a college planning counselor or download our Guide to College Borrowing

 

Topics: Borrowing for College