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.
But First, the FAFSA
Before turning to private student loans, you’ll want to complete the Free Application for Federal Student Aid, or FAFSA. Federal financial aid includes grants, scholarships, and work-study programs, which don’t need to be paid back. The FAFSA also gives you access to federal student loans, which are generally a better deal than private loans. The financial aid office at your preferred college can also help you navigate the different types of loans available to students.
4 Key Factors to Consider When Comparing Loans
Once you’ve completed the FAFSA, you may realize that you’ll need to cover some education costs with a private lender. 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.
This isn’t an exact science, so don’t sweat the nickels and dimes. The goal is to avoid over-borrowing, because you’ll be paying interest on your loans. Also, there’s no rule that says you need to accept the largest loan offered, if you can get by on less.
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.
Recommended: Cash Course: A Student’s Guide to Money
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.
Some borrowers can have a hard time finding someone with good credit who is willing to cosign. Knowing before you begin the loan process whether you’ll need a cosigner and who that cosigner will be can speed the application process. (If you have a minimal credit history, you’ll probably need a cosigner regardless of which lender you use.) Learn more about whether you need a cosigner.
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. First, you can check out the average interest rates for student loans.
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.
Unemployment Protection
Some lenders may offer benefits that protect borrowers who are temporarily unable to pay their bills due to unemployment.
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. Then decide whether you’ll need a cosigner for the loan — someone with good credit who can help secure you a lower interest rate than you’d qualify for on your own. 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 your federal financial aid options and still need funds to cover your cost of attendance, private student loans are one option to consider. Private student loans with SoFi have no fees, including no origination fees or late payment penalties.
Photo credit: iStock/fizkes
SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.
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