Student loans are one way through which many students make their career dreams come true. But, as with any loan, you have to pay them back with interest. That is why you need to borrow wisely and get the best deal with the best terms possible. Here are some parameters you can use while comparing student loan options:
What is the interest rate?
The interest rate on your student loan depends on the type of loan you choose among other factors. Whenever comparing student loan options, you want to find the one with the lowest interest rate but you'll also want to pay attention to the type of interest. For instance, taking a fixed rate loan means that your interest rate will remain unchanged for the whole life of the loan. A variable loan has an interest rate that fluctuates monthly, quarterly, or yearly depending on the prevailing market conditions. A fixed rate may start off slightly higher, but a variable rate caries more risk and might not be the best choice if you don't have much flexibility in your budget or are unsure about your career interests. Consider this when determining what the "lowest" really means.
Student loan APR
The annual percentage rate (APR) allows you to compare loan options side-by-side. Not only does this figure take into account the interest rate, but also takes into consideration the cost of fees & capitalized interested on your loan. APR gives you a holistic picture of how much loans cost, expressed as a rate.
Length of term and its effect on monthly payment
A longer student loan term often reduces the monthly payment amount but in return, often increases the total amount you eventually pay since you pay interest for a longer period of time. On the other hand, a short-term loan increases your monthly payment but can reduce the total amount you have to pay back but reducing the number of years you pay interest. When assessing options, pay attention to the overall cost of the loan (total finance charges) in addition to the rate.
Monthly payment amount
Before you borrow, you should know what your monthly payment will be to ensure it will be affordable for your family. Remember, if you choose a variable rate loan, your monthly payment can change (for the better or for the worse), so you'll want to make sure you have room in your budget if your rate changes. Be sure to choose a loan that will offer a repayment amount that you can keep up with. The monthly payment is determined by the amount you borrow, the length of the term, whether or not payments are deferred while you are in school, fees, and the interest rate. When comparing loans, also find out if there is any way to change your repayment option (and monthly payment) after you enter repayment. Estimate monthly payments here.
Forbearance and deferment options
It is always advisable that you consider your future in terms of repaying your loan. Depending on the loan you choose, you may be allowed to forbear or defer your repayment. Deferring allows you to stop the repayment for a given period (typically while in school, although other reasons may make you eligible) while forbearance may postpone or reduce the monthly rates (usually due to some sort of financial hardship). Federal Subsidized and Unsubsidized Loans have extensive deferment and forbearance options. They vary more among state-based and private student loan options.
There are some loan programs out there (federal loans and state-based loans included) that offer forgiveness options under certain circumstances. For example, if you enroll in a Pay as your Earn repayment program on your federal Stafford loan, you may be eligible for forgiveness on the remainder of your loan balance after 20 years of repayment. If you work full time in public service, that forgiveness may be in as little as 10 years of repayment with monthly payments based on your income. Other programs, such as RI Student Loan Authority's RISLA Student Loan offer $2000 of loan forgiveness to students who complete an eligible internship. Also pay attention to whether you loan is forgiven in the event of death or disability. Investigate these programs and look for loans that have them. Just make sure you are also paying attention to the bigger picture, like interest rate, fees and other terms.
For one reason or another, you may not be able to meet your monthly repayment as per the agreed terms. Therefore, settling for a loan that is flexible and empathetic on your financial capabilities can help you if you land upon financial trouble. Look into whether your loan offers income-based, extended or other repayment plans if you need them. RISLA's college loans offer income-based repayment.
Some loans have fees that significantly increase the total amount to be repaid. Others have not fees at all. Obviously, you do not want to pay more than necessary towards servicing your loan. This is one thing you can’t afford to overlook when comparing student loan options. Pay attention to origination fees & repayment fees as well as late payment fees, administration fees, returned check fees, etc.
Want to know more about borrowing for college? Our Guide to College Borrowing can help.