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Picking a Student Loan Lender

Why It's Important to Do Your Homework

The reality of college is that most students are going to need to borrow money to pay their tuition bills. The lender you choose and the terms of your student loan can have real dollars and cents repercussions down the line. Taking time to do up-front research, to compare your student loan options, and to make smart borrowing decisions can save you money and headaches in the future.

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What to Look for When Choosing a Lender

Student loans can be overwhelming at first glance. You'll see terms like interest rate, grace period, capitalization, borrower benefits, and more. Take a deep breath. You can handle this. And if you need help, don't be afraid to ask. Your college's financial aid office can be a great resource.

Now that you are calm and ready to tackle the task of picking a lender, we're going to walk you through some of the key factors you should consider when picking your student loan provider.

Interest Rate

This one is pretty straightforward: the lower the interest rate, the cheaper the student loan.

However, for private student loans, you need to be aware that not everyone qualifies for the lowest interest advertised by a student lender (yes, we put that in bold because it's important for you to keep this in mind). When you see an ad that says "Interest Rates as low as 4.5%" (or has some other enticingly low number), that's the rate the student loan provider offers student borrowers who have outstanding credit scores or who have co-signors with outstanding credit scores. Private loans will typical have a range of interest rates. If you are going to make assumptions, you probably want to assume you are toward the middle of the range. Or if you know you and your parents (your likely co-signors) may not have great credit, assume you are on the higher end of the range.

Student Loan Fees

Again, as with interest rates, it's pretty cut-and-dry on student loan fees: the lower the fees, the better the deal for you the borrower.

Some common fees you may see include origination fees, federal default fees, and repayment fees.

Federal loans like Stafford and PLUS have origination and federal default fees that can be charged to a borrower. Student lenders and the loan guarantors they work with will waive or cover these fees for borrowers, in some cases. For a PLUS loan, the origination fee can be up to 3% and the default fee can be up to 1%. For Stafford, the origination fee can be up to 1.5% and the default fee can be up to 1%.

For private loans, these upfront fees can vary widely. You may see private loans with zero fees and some with fees as high as 10%. There are no hard caps on the fees that can be charged. Some student lenders may also charge repayment fees. These are usually a percentage of the principal and kick in when your loan enters repayment (that is, after you graduate and start making payments).

Borrower Benefits

Borrower benefits are often used as an enticement by student lenders to attract you to their loan products. Determining which benefits are meaningful to you and which are not is an important part of choosing a lender.

You may see borrower benefits referred to as either front-end benefits or back-end benefits. Front-end benefits are typically discounts in the up-front fees we discussed earlier in this article. You usually will know when you take the loan out if you qualify, and you will save the money immediately.

Back-end benefits refer to benefits that happen once you enter repayment. Usually, you will need to do something to qualify for the benefit, meaning that the savings are not guaranteed. Some typical ones include:

  • On-Time Payments - You get an interest rate discount or principal reduction if you make a specified number of consecutive payments on time. If you are late once, you lose the benefit.
  • Graduation Benefit – You get money back if you complete your educational program. If you drop out, you lose the benefit.
  • Auto-Debit – If you set your student loan payments to be deducted automatically from your bank account, you get a reduction in your interest rate.

As a general rule, back-end benefits that occur earlier and require fewer actions for you to qualify are better. More borrowers are going to qualify for a graduation benefit than a benefit requiring 48 consecutive on-time payments.

You want to make a realistic assessment of whether you will get a back-end benefit. You may end up taking a few months longer to find a job after graduation, missing your first couple of payments. You may be a little strapped for cash right out of college and not want to set up your bank account for auto-debiting.

Customer Service

You're probably going to be paying back your student loans for several years after you graduate. Making sure that your bank has strong customer service will likely make the initial application process much easier and help you avoid headaches down the road.

Some factors that you may want to consider:

  • Application Process – Does the lender offer an online application?
  • Availability – Is there a toll-free number that you can call 24 hours a day, 7 days a week? Will you get a live person on the line without having to wait 30 minutes?
  • Online Account Access – Can you check your account balance online? Can you pay your bill online?
  • Issue Resolution – Does the lender address your complaints promptly? Do they work with borrowers to deal with unexpected problems?

When college financial aid offices choose lenders for their Lender List, good customer service is usually one of the criteria for inclusion.

Ask Questions

Throughout the entire process, make sure you speak up if you are unsure about something. If terms of a loan are unclear, ask the lender for clarification. If you're confused about what you need to do, check with your financial aid office.

Compare Your Student Loan Options

Our Student Loan Marketplace is a great place for you to start your search for student loans. It helps you make apples-to-apples comparisons of student loan products from a number of lenders at once. Our tool enables you to dig into the guts of a student loan so you can decide which one is the best for you.