Most freshman don’t give student loans enough thought. Getting the wrong student loan can have serious financial implications that can last a long time. Student Loans are not all created equal, and putting in a couple of hours into research can save you thousands in the long run.
Because these tips are specifically tailored for freshman, we will start with the basics to make sure nobody makes any blunder that can be easily avoided.
Before you start shopping for a student loan…
Remember that the best student loan is no student loan. Google student loan crisis and you will be inundated with stories about people struggling with their student debt. Nobody goes to college expecting not to finish, or not to be able to find a job when they graduate, but every year it happens. Hope for the best, but plan for the worst. If there is any way to avoid getting a student loan, do it. Work extra hours at your crappy job, stay in a cheaper apartment, go to a less expensive school.
If you are certain that you need to get a student loan, make sure you first fill out the FAFSA. If you think your parents make too much money for you to get FAFSA money, you are wrong. Everybody who fills out the FAFSA will qualify for federal student loans. As freshman, you are limited in the amount of federal student loans that you can get, but everybody qualifies for federal loans. Step number one in paying for school with student loans is to max out your federal loans first. Why? Because federal loans are far better than even the best private loans.
Finding the Best Loan
Once you have maxed out your federal loans, you can begin shopping around for private loans. As far as what company is the best, the answer is that it really depends. Each company will evaluate your credit differently. Some may require a cosigner, others may give you a better rate based upon your income. Just because company A offers the lowest rate, it doesn’t mean that you will qualify for their lowest rate. Shopping around and sending in many applications is essential. Only by going this route can you ensure that you find the best rate. (Bonus Tip: Don’t worry about your credit score getting hurt because you sent out many applications, the credit agencies will treat this as one single credit pull and attribute it to “shopping around”. Whether you apply for 1 or 6 loans, the effect on your credit score is the same.)
Fixed vs. Variable Rate – Right now it is probably best to try and lock in a fixed rate loan. The starting interest rate may be a point or two higher, but in the long run you may end up paying much less. If you opt for a variable rate loan, and interest rates that the banks use go up, your interest rate will go up. A fixed rate mean predictability, and it also allows you to lock in the current low interest rates.
Shopping for student loans is typically just about the best interest rates, but you are also choosing a company that you will be working with for a number of years. Read reviews and make sure you are comfortable entering into this sort of relationship. Getting stuck with a lousy company can make for a miserable experience.
There are a few things that you definitely want to avoid. If you see any of these items, take your business elsewhere. These are things you shouldn’t have to pay for, and if the company is looking to charge them, it is a very bad sign.
Prepayment Penalties – In an ideal world, you get a good job when you graduate and quickly pay off your student loans. In fact, you should work very hard to pay off your student loans as quick as possible. Doing this means you pay much less interest in the long run. However, if the company charges you for paying things off early, they are just making sure that they get a big payday no matter what. With the number of companies out there that do not charge prepayment penalties, you should have no problem making sure that you don’t get stuck paying any penalty.
Origination Fees – Some companies will charge an origination fee, typically of 1% to 3%. This is a fee that it charge from the beginning and added to the balance of your loan. If you borrower $10,000 on a loan with a 3% origination fee, your initial balance on the loan will actually be $10,300. Starting with a higher balance means even more interest and longer to pay back the loan. Here again, most companies have no origination fee, so it should always be avoided.
Any other Fee – There really isn’t a single “fee” that you should have to pay with your student loan. The lender should give you the money, and you should repay it with interest… nothing more. If a lender is tacking on a bunch of fees, you are getting a lousy deal.
Way too many people screw up their student loan decisions. These days there are many resources to make an informed decision. Don’t be afraid to ask questions. These major financial transactions can have lasting consequences.