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.
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,
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.
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 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
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
- 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
good customer service is usually one of the criteria for inclusion.
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
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.