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Student Loans: How to Compare
Student loans are NOT created equal. Here's what to consider before you borrow.
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.
How Much Will You Need?
1. Add up your college costs
This includes tuition and fees, room and board, transportation, books, and personal items throughout the year. This is the best way to get an accurate idea of what that school will cost. If that info isn’t listed in your offer, go online or call the financial aid office to ask for those figures.
2. Subtract your total in grants and scholarships.
These are gift aid—funds you don’t have to repay. If you’ve been offered work–study (money you can earn by working at a campus job), you may also be able to subtract those dollars from your costs, depending on how your school handles those offers.
3. Calculate the remaining amount.
That’s what you’ll pay for one year of college.(To estimate your full college cost, multiply this amount by the number of years needed for your degree.) Most families don’t have this amount in savings, so they typically meet at least part of it through loans.
Four Things to Consider When Comparing Loans
Interest rates
- A fixed rate stays the same over the life of the loan.
- A variable rate changes with the financial markets (meaning that it can go up or down). Variable-rate loans often have lower initial rates, but these rates may rise over time and cost significantly more over the life of the loan.
- A lower rate saves you money.
Fees
Loans can have fees, either when the loan is made or when repayment starts, and you may end up being charged higher fees than the ones you saw advertised. Some lenders won’t provide complete details about their fees until after you’ve applied.
The most common fee is an origination fee, which is charged when you take out a loan. Look for no or low origination fees.
Repayment options -- find out:
- when repayment begins and the amount of the monthly payments
- the number of years it’ll take to pay off the loan
- whether you’ll be eligible for periods of reduced payment or temporary suspended payment if you go back to school or experience economic hardship
- about income-based repayment options or possibilities for loan forgiveness
Payment responsibility & cancellation
Some families want only the student to take out the loan; others may prefer that the parent take on the debt. Who’s responsible for paying which loan?
- The student is the borrower for federal Direct Subsidized and Unsubsidized loans. These loans are in the student’s name and only the student is obligated to repay these loans. Parents are not responsible for repaying their children’s federal student loans.
- Both the student and a credit-worthy cosigner are the borrowers for VSAC’s student loan and most student loans from private loan lenders. A cosigner shares responsibility with the student borrower for repaying the loan if the student isn’t able to make the loan payments.
- The parent is the only borrower for federal Direct PLUS loans for parents, for VSAC’s parent loan, and most parent loans from private loan lenders. These loans are in the parent’s name and cannot be transferred to the student.
Ask these questions:
- If a cosigner is needed, can that cosigner be released after meeting certain criteria or other conditions? If so, under what conditions?
- Will the debt be cancelled if the borrower or student dies or becomes permanently disabled?
Know before you sign!
- Look for no or low origination fees and watch for hidden costs.
- Ask for a full fee schedule up front.
- Never sign without knowing what you might pay and determining all possible 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.
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.
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.
BEWARE OF TEASER RATES
“Teaser rates” are the low advertised rates that few borrowers actually qualify for, and may include shorter repayment terms of 5 years. If you get an interest rate higher than you expected, stop (or pause) the application process and compare your other loan options.
Consider Repayment Options
- What are the repayment options for the loan? When will you have to start repaying the loan? 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.
- 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.
How Do Credit Inquiries Affect Your Credit Score?
Many believe that if they shop around for loans, every inquiry into their credit will have a negative impact on their credit score. Not so.
In general, the credit bureaus expect borrowers to “rate shop,” so if credit bureaus see multiple inquiries for a similar loan type within a certain timeframe (30 days is a good rule of thumb, though this can vary), they consider the activity to be a single inquiry against your credit score.
So, 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 shop around.
Minimize Debt Before Borrowing
Follow these tips to keep your education debt as low as possible:
- Take advantage of free aid first. Apply for all available grants and scholarships. This “gift aid” doesn’t have to be paid back.
- Use savings and current income. Explore tuition payment plans, which spread payments out over the academic year.
- Cut expenses. How much can you economize while in school?
- Estimate your future monthly payments. 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.