Finding the best possible student loan doesn’t have to take long, but it does require some thought.
This purpose of this guide is to help borrowers identify the best student loan for their particular circumstances.
Some loans are objectively terrible, while others might be the necessary tool to fund an education. The tips and suggestions in this guide come from nearly a decade of work helping borrowers deal with the consequences of their student loan decisions. I normally advise against borrowing when possible, but if a student loan is required, it is critical to avoid mistakes.
Should I Borrow a Federal Government Loan or a Private Student Loan?
One of the biggest mistakes that a student can make is borrowing private student loans instead of federal government loans.
Extensive borrower protections make federal student loans are a much better option. In addition to the many student loan forgiveness programs, there are also repayment plans that charge borrowers based upon how much they can afford rather than what they owe. These borrower protections help borrowers avoid student loan nightmares.
People attend college with the expectation of getting a degree and a good job. Unfortunately, some of these students will not ever graduate. Others won’t find a job in their field of choice. Others may choose less lucrative but more meaningful work. The wide variety of potential outcomes makes it essential to choose flexible student loan options.
The problem with private loans is their unforgiving nature. Many lenders have little patience for late or missed payments. Making things even more complicated is that bankruptcy from student loans is nearly impossible under the current rules. Borrowers who owe more than they can ever afford may end up making student loan payments for life. They also run the risk of damaging their credit score.
With high stakes and an uncertain future, federal loans are the better option.
The only time a private loan might make more sense is for a borrower who plans on quickly paying back their debt. A borrower opting for a private loan must be certain that they can afford all future payments. An example might be a non-traditional student going back to school for a few classes.
Absent a situation where repayment is a certainty, federal loan flexibility outweighs even the best interest rate offerings on private loans.
The Differences Between Federal Subsidized Loans and Unsubsidized Loans
With a subsidized loan, the government pays the interest during school and in a few other limited circumstances. Unsubsidized federal loans mean that the borrower is on the hook for all of the interest.
As one might expect, getting subsidized loans is more difficult than getting an unsubsidized loan. The good news is that it is only slightly more difficult.
The first significant limitation on subsidized student loans is that the federal government imposes much lower borrowing limits.
The other major limitation is that a student must demonstrate a financial need to get a subsidized federal loan. Fortuantely, the applications for both types of loans are identical. Students and their families must complete the FAFSA. Students from families with limited income may qualify for subsidized loans. At minimum, most families will qualify for an unsubsidized federal loan. The only way your family wouldn’t qualify is if your EFC was greater than the estimated cost of attendance for your school. This normally doesn’t happen if your income is less than $300,000 per year.
Should I get a Parent PLUS Loan or Co-Sign a Private Student Loan?
Parent PLUS loans are federal student loans, but they have limitations. Instead of being borrowed by the student, the parent borrows the loan. When paying for college, this difference may seem small, but in repayment, it is a significant difference. The loan is in the parent’s name, and the parent is responsible for the debt. This system creates issues when the parent expects the child to pay and the child expects the parent to pay. The debt collectors will chase after the parent.
Another key difference between a parent PLUS loan and most other federal student loans is that the interest rate and fees associated with the loan are higher. At present, the interest rate is 5.30%, and the loan origination fees are over 4%.
Additionally, Parent PLUS repayment plans are more limited than the options for other federal student loans.
These higher rates and fees combined with more limited options make Parent PLUS loans noticeably different than other federal student loans. Families should probably treat Parent PLUS loans as a viable option, but it isn’t the no-brainer that other federal loans are.
The option that many parents consider in place of a Parent PLUS loan is to co-sign their child’s private loan. Often students lack the credit history to qualify for a private loan on their own, so lenders require a parent to co-sign the loan.
Deciding between these two options can come down to the parent’s ability to pay for the debt. If the monthly payments might become an issue, it is safer to go with the Parent PLUS loan and all of its warts.
Graduate PLUS Student Loan Options and Alternatives
For students going after a graduate degree, the Graduate PLUS loan can be a great option.
Unfortuantely, like Parent PLUS loans, the interest rates and loan origination fees are higher than most other federal student loans. The good news is that, unlike a Parent PLUS loan, Graduate PLUS loans have a wider variety of repayment plans and forgiveness options.
For most graduate students, the choice comes down to a Graduate PLUS loan or a private loan. In most cases, the Graduate PLUS loan is the preferred alternative.
Even though the Graduate PLUS loan does have higher interest rates, it is money well spent due to the federal protections. Many graduate students borrow upwards of $100,000. If there is any uncertainty in the job market or borrower’s ability to pay, having student loans with forgiveness provisions is a huge security blanket.
Private loans start to make sense for those with a high degree of confidence in their ability to repay. An example would be someone returning to school to get an MBA at night. Students can minimize borrowing costs if they have a sufficient current salary to handle future loan payments.
Selecting the Best Private Student Loan
Concluding that a private student loan is the only way to pay for college can be scary. The risks are higher, but if the gamble pays off, it can lead to a valuable degree and a bright future.
Students deciding to choose a private student loan should know that these loans are not all created equal. Some private student loans are far better than others.
Because there are many lenders offering these loans, students should insist that they not be charged any loan fees, such as an origination fee or is disbursement fee. Students should also be sure to shop around to get a low interest rate loan. A difference of even a fraction of a percent can add up to a lot of money in repayment.
One crucial detail to understand is that the rates advertised by lenders are not necessarily the rates actually offered. Most lenders have their own unique criteria for evaluating applications, and each lender may give different weights to credit history, school, and area of study. Companies like credible can help students compare rates with a number of lenders. The key is to cast a wide net.
Even if a student can find an excellent loan, it is still critical to only borrow that which is necessary. If you live off private student loans, you should be careful to keep expenses as low as possible.
Borrowing Money When Student Loans are Not an Option
A common question that we receive is from students who are not able to get any student loans. They want to know what the next best option is to pay for school. This situation normally occurs because they have borrowed the maximum estimated cost of attendance as determined by their school or cannot qualify for any more student loans.
In either scenario, the difficulty of getting a student loan should be a huge red flag. Either the school is saying that it shouldn’t cost that much to attend, or lenders are unwilling to provide money because they don’t think they will get paid back. These large institutions are skilled at evaluating risk, so students should take the denials and rejections seriously.
Is there a less expensive alternative? Can the office of financial aid provide additional scholarships or grants? Is the school attended worth the cost?
Those that are truly desperate normally have to turn to a personal loan when all other student loan options do not exist. Personal loans normally have higher interest rates, and repayment starts immediately. Rarely is this route advisable.
Picking the Best Student Loan
The best student loan is not to get a student loan.
The second best student loan is one that is well researched and compared against the available alternatives. With a variety of federal and private loans to choose from, it is critical to spend some time evaluating the pros and cons of the possible choices. The work isn’t complicated or time-consuming, but it is essential to intelligent borrowing.