Student loans: How to compare

Student loans are NOT created equal. Here's what to know before you borrow.

There are so many student loan options available, with each lender shouting out rates and benefits. But what does it all mean, and how do you really know which loan is better than the next? 

We want to help you sharpen your skills to become a more confident borrower as you shop around. We’ll show you what to look for and how your choices can help reduce the amount you’ll ultimately have to repay for the next 10 or 15 years.

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Consider Interest Rates

Yes, interest rates matter. Here's why.

A lower fixed interest rate is a good thing, but how much does a difference in rate matter in real dollars—both the amount you’ll pay per month and the total over the entire term of your loan?

Think a few percentage points don't matter? Think again. Here’s an example that shows the different amounts you could expect to pay monthly and in total, based on 3 possible hypothetical rates. 

VARIABLE VS. FIXED

Fixed interest rates stay the same over the life of the loan. Variable interest rates change with the financial markets (which means they can go up!). Variable rates can start low, then rise and end up costing a lot more over the life of the loan. That's why VSAC offers only fixed-rate loans. We believe they are the safest option for borrowers.

 

Explanation: This comparison example is based on a loan amount of $15,000, with no fees, paid over 15 years. The rates featured are three possible fixed interest rates you may find in the college loan marketplace today. These rates do not reflect the offerings of a particular lender.

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Interest rates matter! Based on these three scenarios, total loan costs differ from $3,116–$7,413.

Monthly payments differ from $17–$41 per month. Even $17/month can add up to more than $200/year.

Consider Repayment Options

  • How many years will it take to pay off the loan? The repayment length, or term of the loan can be 10 years, 15 years, or even less. Compare how the repayment length affects the total cost.
  • When will you begin repayment? You’ll pay less over the life of your loan if you pay interest or monthly payments while you’re in school rather than deferring or extending payments.
  • What are the repayment benefits? Are there options for reduced payment or suspended payment if you experience economic hardship? Ask also about income-based repayment and loan consolidation or forgiveness.

WANT TO SAVE MONEY IN REPAYMENT?

Can you pay more than the amount due? Adding a little extra to each on-time monthly payment can reduce the total amount you'll pay over the life of the loan.

Consider repayment options

Does comparison shopping hurt your credit score?

Many folks believe that if they shop around for loans, every inquiry into their credit will have a negative impact on their credit score. Not so.

While the FICO scoring formula does take student loan comparison shopping into account, loan shopping during a certain timeframe (30 days is a good rule of thumb, though this can vary), generally will have little to no effect on your credit score. With that said, it's considered good practice to do some comparison shopping before you apply. 

If you’re not offered loan terms (rates & fees, for example) that you expected when you applied for a particular loan, stop your application and ask why. If it's a result of your credit score, see if there's another lender that can offer you a better rate with your score.

For a more comprehensive discussion of rate-shopping and inquiries, click here. Get more information and advice on how to protect your credit score at myfico.com.

 

 

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Minimize Debt Before Borrowing

Follow these tips to keep your education debt as low as possible:

  1. Take advantage of free aid first. Apply for all available grants and scholarships. This “gift aid” doesn’t have to be paid back.
  2. Use savings and current income. Explore tuition payment plans, which spread payments out over the academic year.
  3. Cut expenses. How much can you economize while in school? 
  4. Estimate your future monthly payments with the College Board’s loan payment calculator. Ideally, student loan payments should consume no more than 15% of your income after college graduation. The interest rate and the repayment plan you choose will impact your total cost of borrowing. And remember, you may need to borrow for 4 years of school. Consider the entire amount you'll be responsible for when you finish your education.

BORROW ONLY WHAT YOU NEED

Your goal should be to minimize loans as much as possible. You can choose to decline a loan or borrow less than the offer, reducing what you’ll need to pay back.

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