Comparing Student Loans: Key Factors to Look At
All student loans are not alike. In fact, shopping around for a loan is not so different from buying a car. Some lenders offer better deals than others, and it helps if you know a little something about what’s “under the hood.”
Read on to find out what to look for when comparing student loans — from interest rates and fees to payback terms and special protections for borrowers. Soon, you’ll be able to choose a loan with confidence that it’s the right one for you.
Key Points
• When comparing private student loans, evaluate both fixed and variable rates to determine which offers the most cost-effective option over the life of the loan.
• Assess the length of repayment periods, as longer terms may result in lower monthly payments but higher overall interest costs.
• Be aware of any origination fees, prepayment penalties, or late payment charges that could increase the loan’s total cost.
• Look for flexible repayment plans, such as interest-only payments while in school or deferment options, to accommodate your financial situation.
• Research customer service quality and read reviews to ensure the lender is reliable and responsive to borrower needs.
Understanding Private Student Loans
Private student loans can help bridge the gap when federal aid and scholarships aren’t enough to cover the full cost of college. Unlike federal loans, which are backed by the government, private student loans are offered by banks, credit unions, and online lenders, each with its own terms, interest rates, and eligibility requirements.
What Are Private Student Loans?
Private student loans are education loans provided by private lenders to help students pay for tuition, books, and living expenses. They typically require a credit check and may have fixed or variable interest rates. Unlike federal loans, private loans do not offer benefits like income-driven repayment plans or loan forgiveness programs.
Recommended: A Complete Guide to Private Student Loans
Differences Between Private and Federal Student Loans
Private and federal student loans differ in several key ways, including eligibility requirements, interest rates, and repayment options.
Federal loans are funded by the government and typically offer fixed interest rates, income-driven repayment plans, and loan forgiveness programs, making them more flexible for borrowers. They do not require a credit check (except for PLUS loans) and often have lower interest rates.
In contrast, private student loans are provided by banks, credit unions, and online lenders, usually requiring a credit check and often a cosigner. These loans may have fixed or variable interest rates, fewer repayment options, and no federal borrower protections.
Undergraduate Student Loans
Undergraduate private student loans are designed for students pursuing a bachelor’s degree. These loans typically require a creditworthy cosigner since most undergraduates have limited credit history. Interest rates may be fixed or variable, and repayment options vary by lender.
Graduate Student Loans
Graduate student loans cater to students seeking advanced degrees, such as master’s, law, or medical degrees. Students can access federal loans, like Direct Unsubsidized Loans and Grad PLUS Loans, which typically offer fixed interest rates and flexible repayment options. Private lenders also provide graduate loans, often requiring a credit check or cosigner for approval.
Specialized Student Loans
Some private lenders offer specialized student loans for specific fields, such as medical, dental, law, or business school students. These loans may have unique benefits, like extended grace periods, higher borrowing limits, and flexible repayment options to accommodate the rigorous demands of certain professional programs.
Recommended: What You Need to Know About Student Loans, Grants, and Scholarships
4 Key Factors to Consider When Comparing Loans
When comparing private student loans, it’s important to evaluate several key factors to ensure you choose the best option for your financial needs. Weighing the factors below will help you choose the right lender and loan for you.
1. How Much Do You Need to Borrow?
When calculating how much you’ll need to borrow the first year, answer the following questions to the best of your knowledge:
• Will you have an off-campus job?
• Will you receive any tuition assistance from your family?
• How is tuition structured at your institution? At some colleges, you may pay per credit. Other colleges have flat tuition, regardless of how many credits you take.
• Living expenses should be a part of your calculations. Are there ways to trim those costs? For example, can you live at home or with roommates? Can you rely on public transportation instead of your own car?
• How many years will it take to complete your course of study? Does it make sense to take an accelerated program and complete coursework in fewer years? On the flip side, can you stretch out coursework to make more time for a part-time job?
• Do you need to spend all four years at your first-choice college? Some students minimize their overall tuition bill by spending a year or two at a state or community college before transferring to a pricier dream school.
You may even want to look at how well your future income will cover your bills after graduation. Search job listings and talk to recent grads in your potential field of study to get the scoop on entry-level salaries.
All this will give you a solid understanding of how much you’ll need to borrow. The next step is to compare the loans available from a variety of lenders.
2. Do You Need a Cosigner?
Private loan terms are mostly determined by the borrower’s financial history, employment status, and credit score. The longer your history and higher your score, the better your interest rate. Since most students have a minimal credit history, they often apply for student loans with a cosigner.
A cosigner is someone who agrees to pay the loan in case the main borrower is not able to. A cosigner needs to provide financial information (such as employment status) and agree to have their credit checked. Should there be any issues with repayment on the loan, both the borrower’s and the cosigner’s credit may be affected.
3. What Are the Loan Terms?
Your loan “terms” will determine the overall cost of your loan and your monthly payments. These terms include:
Interest Rate
Your interest rate will partly determine how much money you owe over the life of the loan. Many private lenders have an online tool that allows potential borrowers to see their estimated interest rate before they apply for the loan.
Interest rates may be either fixed or variable. A fixed rate means the rate won’t change during the life of the loan. A variable rate can fluctuate over time. Variable rates may start lower than fixed rates but can go higher in the future. Sometimes, a variable rate makes sense for people who plan to pay off the loan quickly. A fixed rate is a good idea for people who want to budget the same amount per month.
Length of Loan
A shorter loan term typically has higher monthly payments but is less expensive, since interest has less time to accrue. A longer repayment period usually has lower monthly payments, but will cost you more in interest overall.
Another factor to consider is prepayment penalties. This is when a lender charges you a fee for paying off your loan before the end of the loan term. Many private lenders allow prepayment without any fees, but make sure to check with any lenders you are considering.
Repayment Options
Repayment schedules vary by lender. Some may allow borrowers who are in school to defer payment until after they graduate. Others may allow student borrowers to make interest-only payments.
Find out whether or not the lender offers flexibility in switching repayment plans during the life of the loan.
Loan Fees
Lenders make money on loans by charging borrowers interest. Some student loan lenders also charge additional fees. Student loan fees may include:
• Origination fees – charged by the lender for processing the loan
• Late payment fees
• Returned-check fees
• Loan collection fees
• Forbearance and deferment fees
Before you choose a private loan, find out what fees (if any) you may incur.
Recommended: How Do Student Loans Work?
4. How Good Is the Lender’s Customer Support?
The above three factors are what’s known as “loan terms.” The last factor has to do with how the lender will support you, the borrower, during the life of the loan. This includes:
Customer Service
If you have questions or concerns, how can you contact your lender? Can you call a live person, or must you deal with a chatbot?
Financial Tools
Some lenders offer financial resources and tools to their borrowers, such as webinars, articles, and calculators.
Factors Affecting Private Student Loan Rates
Private student loan interest rates are influenced by several factors, including the borrower’s creditworthiness, loan term, and whether the rate is fixed or variable. Lenders assess financial history, income, and the presence of a cosigner to determine risk. Additionally, market conditions and lender policies play a role in setting interest rates.
Credit Score
A borrower’s credit score is one of the most significant factors affecting private student loan rates. Higher credit scores typically qualify for lower interest rates, as they indicate responsible financial behavior and lower risk to lenders. Those with lower credit scores may face higher rates or require a cosigner to secure better terms.
Pros and Cons of Private Student Loans
Private student loans can be a useful option for borrowers who need additional funding beyond federal aid. While they offer flexibility and higher borrowing limits, they also come with potential downsides, such as varying interest rates and fewer borrower protections. Understanding the pros and cons can help determine if they are the right choice.
Benefits of Private Student Loans
Benefits of private student loans include:
• Higher borrowing limits than federal loans
• Competitive interest rates for borrowers with strong credit
• Flexible repayment options, such as interest-only payments while in school or extended loan terms
Drawbacks of Private Student Loans
Cons of private student loans include:
• Lack income-driven repayment plans and loan forgiveness options
• Higher interest rates for those with lower credit scores
• Often require a cosigner, which can put financial responsibility on someone else if the borrower struggles with repayment
The Takeaway
If you’re new to borrowing money — as most undergrads are — you may not know what to consider when choosing a student loan. Before you shop around, determine how much you need to borrow by creating a college budget that includes tuition and fees, books and supplies, and living expenses.
When comparing loans from different lenders, you’ll want to look at the interest rate, length of the loan, any fees and penalties, and the lender’s reputation for customer service. It all comes down to saving money over the life of the loan. If you’re careful, you won’t pay more than you need to.
If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.
FAQ
What factors should you consider when comparing student loan lenders?
When comparing lenders, consider interest rates, loan terms, fees, repayment options, and customer service reputation. Evaluating these factors ensures you choose a lender that offers the best financial flexibility and minimizes long-term borrowing costs.
How do interest rates impact the cost of a student loan?
Interest rates determine how much you’ll pay over the life of the loan. Fixed rates provide stable payments, while variable rates can change over time, potentially increasing costs. Choosing a lower rate can help reduce total repayment amounts.
What are some common repayment options offered by student loan lenders?
Many lenders offer options like deferment while in school, interest-only payments, and income-driven repayment plans. These flexible repayment options can help students manage their finances and avoid defaulting on their loans.
Photo credit: iStock/LSOphoto
SoFi Private Student Loans
Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 04/24/2024 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org).
Please borrow responsibly. SoFi Private Student loans are not a substitute for federal loans, grants, and work-study programs. We encourage you to evaluate all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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