If the first hurdle of higher education is getting into school, the second may be figuring out how you’re going to pay for it. Even with federal loans, work-study grants, scholarships, and savings, students may need financing to cover all of their educational costs. That’s when private lenders may be able to help.
But if you are new to borrowing money—and you probably are if you are an undergrad—knowing what to consider when looking at private student loans can be overwhelming. Read on for more information on important considerations when comparing student loans.
4 Key Factors to Consider When Comparing Loans
Of course, before borrowers explore private loans, they’ll want to complete the Free Application for Federal Student Aid (FAFSA®) to apply for federal aid including work-study, grants, scholarships, and federal student loans. The financial aid office may also be helpful in assisting students as they navigate options regarding different types of loans.
Once you’ve determined that you’ll need to cover your education costs with a private lender, weighing these factors will help you choose the right lender for you.
How Much Do You Need to Borrow?
Eventually student loans will need to be repaid, so it’s important to consider how your income may cover repayments after graduation. It can be helpful to talk to graduates in your potential field of study who can speak to salary ranges and explore the average salary for jobs in your area online.
If you’re at the beginning of your college career and are weighing different schools (and their price tags) it may be helpful to speak to your guidance counselor to assess different avenues to achieve your goals. For example, some students may start their college career at community college for two years, then transfer to their chosen school to minimize the overall tuition bill.
You may also consider:
• Whether you’ll have an off-campus job.
• Whether you’ll receive any tuition assistance from your family.
• How tuition is structured at your institution. At some colleges, you may pay per credit. Other colleges have flat tuition, regardless of how many credits you take.
• Will you need money for living expenses? Is there any way to trim that cost, such as living at home or with roommates?
• How many years will it take to complete your course of study? Would it make sense to take an accelerated program and complete coursework in fewer years, or would it make sense to stretch out coursework so you can work concurrently?
Answering these questions can help students understand how much money they may need to borrow in student loans. Keep in mind that borrowers are also generally limited to borrowing no more than the school’s cost of attendance. Having an idea of how much a student needs can help them from over-borrowing—there’s no rule that says you need to accept the largest loan offered.
Considering things like your expenses and your future income can help you assess the amount you’ll need. Once you know how much you’ll need, compare options available from a variety of lenders.
Recommended: What is the Average Cost of College Tuition?
Is There a Need for a Cosigner?
Borrowers who have a minimal credit history, or have a less-than-ideal credit score, may consider a cosigner. This is someone who agrees to pay the loan in the event that the main borrower is not able or willing to pay. A cosigner will have their name on the loan and will also need to provide financial information, such as employment status, as well as agree to have their credit checked. Should there be any issues with repayment on the loan, both the borrower and the cosigner may have their credit impacted.
Not every loan necessarily needs a cosigner, and the need for a cosigner is dependent on factors including the borrower’s own credit history and employment status. Some borrowers may have a hard time finding a cosigner, and a cosigner can be a hurdle in establishing a loan. Knowing before you begin the loan process whether you will need a cosigner and who that cosigner might be can be helpful in making the application process as streamlined as possible. But if a borrower has a minimal credit history, then they may need a cosigner regardless of which lender they use.
What Will The Loan Terms Be?
Comparing terms is important in determining what your overall loan cost may be, as well as how much your monthly payments will be. These terms include:
Comparing the average interest rates for each loan offered can be helpful, since that will determine how much money is owed over the life of the loan. Many private lenders have a tool that allows potential borrowers to see an estimated rate without formally applying for the loan and having a hard credit check.
Depending on 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 the life of the loan. Variable rates may start lower than fixed rates but could go higher during the life of the loan. Sometimes, a variable rate may make sense for people who have plans to pay off the loan quickly. A fixed-rate can make sense for people who want to budget the same amount per month.
Repayment plans will also vary by lender. Some may allow borrowers who are in-school to defer payment until after they’ve graduated. Others may have options that allow student-borrowers who are enrolled to make interest-only payments.
Find out whether or not the lender offers flexibility in switching repayment plans during the life of the loan.
Private loans have different terms. A shorter loan term may have higher monthly payments but could be less expensive over the life of the loan, since less interest may accrue overall.
Another factor to consider is any prepayment clauses or penalties. Many private lenders prepayment without any fees, but some may charge a prepayment penalty.
Recommended: How To Avoid Paying a Prepayment Penalty
Before you choose a private loan, borrowers may compare fees that may be incurred from the loan. These could be origination fees, application fees, or late fees.
How Will the Lender Support You?
In addition to considering the loan terms, it’s also helpful to consider how the lender will support you during the life of your loan. This includes:
If you have questions or concerns, how can you contact your lender?
Some lenders offer financial resources and tools, such as webinars, seminars, or information to their borrowers.
Some lenders may offer options if you were temporarily unable to pay your bills due to unemployment. For example, SoFi offers Unemployment Protection for some borrowers who have accounts in good standing and lose their job through no fault of their own.
Taking out private student loans is a big decision, and comparing all options and scenarios can be helpful in finding the best choice for you. Taking your time to consider options and talking through the pros and cons can be helpful in landing on the best choice for your needs.
Photo credit: iStock/fizkes
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SoFi Private Student Loans
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