Getting student loans to pay for college can be daunting, especially with the complex array of options available. Choosing the right loans with favorable rates and terms can save thousands of dollars over the repayment period. This comprehensive guide provides tips and strategies for students to secure the best rates and terms on student loans in 2023.
Develop a Financing Strategy Based on Costs and Available Aid
The first step is to evaluate the full costs of attendance at your chosen school. This includes tuition, room and board, books, transportation, and other expenses. Next, deduct any scholarships, grants, work-study opportunities, and other aid you may receive. The remaining amount represents how much you’ll need to fund through savings, income, family support, and student loans. Establishing this budget helps you borrow only what is absolutely needed.
Understand the Main Types of Student Loans
There are two major categories of student loans:
Federal Student Loans
These are funded by the federal government and should be your first choice due to favorable rates, terms, protections, and repayment options. Federal loans don’t require credit checks or cosigners. Types include:
- Direct Subsidized Loans: For undergrads with demonstrated financial need. The government pays interest while enrolled at least half-time.
- Direct Unsubsidized Loans: Available to all students regardless of need. You’re responsible for all interest.
- Direct PLUS Loans: For graduate students and parents of undergrads. Higher credit standards apply.
- Perkins Loans: Low-interest loans for students with exceptional need. Funds are limited.
Private Student Loans
Offered by banks, credit unions, and online lenders. Rates and terms vary more than federal loans. Likely requires good credit and/or a cosigner. Can supplement federal options once those are maxed out.
Max Out Federal Student Loan Options First
Always prioritize federal direct loans up to your maximum annual limits before considering private loans. Federal loan advantages include:
- Fixed interest rates, currently between 4.99% – 7.54%
- No credit check or cosigner requirements
- Multiple repayment plans including income-driven options
- Deferment and forbearance options if struggling to repay
- Potential loan forgiveness programs
- Discharge of debt if you become disabled
In comparison, private loan rates often start higher and vary over time. You also lose critical protections and benefits. Exhaust federal options even if it requires multiple loans each year.
Consider a Cosigner to Get the Best Private Loan Terms
Rates on private student loans depend heavily on your credit score and income. Most lenders require scores in the high 600s or better for the lowest rates. Students with little or no credit history will likely need a creditworthy cosigner, usually a parent or guardian. Cosigning shares responsibility for the debt, so consider this decision carefully.
Adding a cosigner greatly improves your chances of approval and secures the best available rate. The cosigner’s income may also help qualify for a lower rate. Compare options with and without a cosigner. Just be sure the cosigner understands the obligation they are taking on.
Compare Multiple Lenders to Find the Best Rates
It pays to check rates from several private student loan companies before committing. Online lenders like College Ave, Sallie Mae, Sofi, and Citizens Bank often offer rates competitive with major banks. Comparison sites like Credible and LendKey let you check personalized rates from multiple lenders at once.
Consider factors beyond rates like origination fees, repayment terms, cosigner release options, unemployment protections, and customer service reputation. A slightly lower rate may not provide the best overall value in the long run. Weigh the pros and cons of each lender carefully.
Apply with a Creditworthy Cosigner to Get the Best Rates
Here are the approximate rate ranges recently offered based on credit scores, with and without a cosigner:
| Credit Score | Rates Without Cosigner | Rates With Cosigner |
| 720+ | 4.25% – 7.25% | 3.25% – 4.25% |
| 680-719 | 5.75% – 8.75% | 3.75% – 5.75% |
| 650-679 | 7.30% – 9.50% | 5.30% – 7.50% |
| 600-649 | 9.55% – 12.30% | 6.80% – 10.30% |
| Below 600 | May not qualify | May not qualify |
As shown, applying with a cosigner in the 720+ credit range can reduce rates by 1-3 percentage points compared to applying alone with good credit. Every percentage point you save reduces costs over the life of the loan.
Understand the Two Main Ways Student Loan Interest Accrues
Private student loans charge interest using either the Simple or Compound method. This impacts total costs:
- Simple Interest: Interest accrues only on the original principal. Your payments go directly towards reducing the principal. This is the most financially favorable option.
- Compound Interest: Interest accrues on the original principal and any unpaid accrued interest. Your payments apply first to accrued interest, increasing total costs over time.
Always choose simple interest loans when possible to minimize finance charges. Ask lenders which method they use. Many allow you to choose between the two.
Consider a Variable Rate for More Initial Savings
Many lenders offer a choice between fixed and variable interest rates. Fixed rates stay the same over the full term while variable rates fluctuate based on market indexes:
- Fixed Rates: Provide certainty and stability for easy budgeting through graduation and beyond. Initial rates may be slightly higher than variable loans.
- Variable Rates: Currently start lower but could increase over time as markets change. Caps limit maximum rises. Offer more initial savings but long-term costs are uncertain.
Evaluate your timeline, budget factors, and risk tolerance. Variable rates work well if you can pay off debt quickly before potential increases hit. Lock in fixed rates if you need set payments for peace of mind.
Review All Repayment Terms Carefully
Understanding loan repayment terms helps avoid surprises or shortfalls down the road:
- Grace Periods: The interval after graduation before payments are due, usually 6 months. Interest still accrues.
- Deferment or Forbearance: Lets you temporarily postpone payments under certain circumstances for a set time. Unpaid interest still adds up. Federal loans offer more flexibility.
- Loan Terms: Standard is 10 years but lengths up to 20 years are sometimes available. Longer terms have lower monthly costs but substantially higher total interest paid over time.
- Prepayment Policies: Many lenders waive early payoff fees. This lets you pay down principal faster to reduce costs if cash flow allows in the future. Be sure to ask.
- Cosigner Release: Find out the requirements to remove a cosigner from the loan after establishing good payment history on your own. This provides flexibility down the road.
Watch Out for Origination and Disbursement Fees
Many lenders charge fees to originate and disburse new student loans. These get deducted from the loan amount, reducing funds available to cover college costs. Typical amounts include:
- Origination Fees: 0% to 6% of the loan principal requested
- Disbursement Fees: $0 to $50 per school term when loan funds are paid to the college
Avoid lenders tacking on excessive fees that inflate the true cost of borrowing. Every dollar that goes to fees cannot help pay tuition or other expenses. Minimize fees wherever possible.
Submit Early Loan Applications for Full Consideration
Loan applications for each academic year open many months in advance – often October 1st for the upcoming fall semester. Submit applications as early as possible once the window opens to allow adequate time for processing and disbursement.
Secure rates 60-90 days before college bills are due to ensure loans are approved and funded on time. Missing key deadlines can jeopardize enrollment or force you to borrow more expensive private loans at the last minute.
Moving quickly also helps you secure the lowest advertised rates. Limited funds are available at discounted promotional pricing. Take advantage of early savings opportunities.
Ask About Scholarship and On-Time Graduation Rewards
Many lenders now offer borrower incentives and rewards designed to help reduce costs:
- Interest rate discounts for academic achievements like making the Dean’s List or maintaining a certain GPA
- Additional scholarships awarded for meeting certain eligibility criteria
- On-time graduation rewards if you complete your degree program early
These incentives pay off by bringing down the overall cost of borrowing. Be sure to understand the specific requirements to qualify and ask lenders if they offer programs for strong students.
Review All Repayment Options Before Committing
One of the top benefits of federal student loans is the ability to select personalized repayment plans. Research the options like Standard, Graduated, Extended, Income-Driven, and Public Service Loan Forgiveness programs before borrowing to understand the costs, timelines, eligibility rules, and other factors that impact your long-term payment structure. The plans with the lowest monthly costs often increase your total interest expense over time. Evaluate both short and long-term impacts before committing to a loan program.
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Frequently Asked Questions
1. Should I pay interest on student loans while still in school?
Paying down interest while still enrolled, also known as capitalization, saves money by preventing unpaid interest from being added to your principal balance when repayment begins. This benefits borrowers who can afford to pay even small amounts along the way. However, don’t stretch your budget too thin as preserving savings, earnings, and financial aid for direct college expenses should remain the priority.
2. Are student loans dischargeable in bankruptcy?
Federal student loans are rarely fully discharged in bankruptcy except in cases of permanent disability or death. Private student loans fall under regular bankruptcy laws, but proving undue hardship is still difficult. Overall, it is very challenging to get student loans removed through bankruptcy. Your best options are to pursue lower payments through federal repayment programs or refinancing to improve private loan costs instead.
3. Should I consolidate or refinance student loans?
Federal loan consolidation combines multiple federal loans into one new loan to streamline billing and allow access to certain repayment programs. Federal direct consolidation loans make sense for borrowers seeking lower monthly payments through income-driven repayment. Refinancing replaces existing private and federal loans with a new private loan at lower rates. This helps accelerate repayment but sacrifices federal perks and protections. In general, refinance private loans and consolidate federal ones as needed based on your goals.
4. Should parents take out PLUS loans or have students borrow more?
PLUS loans add debt in the parent’s name while extra student loans increase the child’s obligation. The best option depends on factors like repayment timeline, expected income, target retirement age, the presence of cosigners, and more. Crunch the numbers for both scenarios. In many cases, moderate PLUS loans while pursuing higher-earning degrees can work well, but larger PLUS amounts are riskier. Consider a mix of both loan types if possible.
5. How do I get the best rates on student loans as an international student?
International students with little or no US credit history face higher hurdles. Finding a creditworthy US citizen or permanent resident to cosign is key to accessing the top rates. If not possible, applying with an international cosigner still helps. Start building your own US credit early through credit cards, rent, or phone bills. Also look for lenders familiar with international applicants. While challenges exist, flexible lenders do offer international students decent private loan options.
6. What student loan relief options exist in case of unemployment after college?
Federal loans offer deferment, forbearance, and income-driven repayment to reduce or postpone payments during unemployment. Private lenders have more discretion but some provide forbearance and modified repayment options for several months if you communicate proactively about job loss. Ask about hardship protections before choosing a private lender. Building an emergency fund can help cover loan payments if a grace period has already ended. Be sure to understand all options and plan ahead to avoid default.
Finding affordable financing for college is possible with the right combination of strategic borrowing, maximizing aid, and shopping lenders to secure favorable rates and terms. Carefully managing student loans leads to a healthier financial life after graduation. Use this guide to help demystify the process and set yourself up for success. With the right preparation, smart planning, and active management, student loans can serve as an engine for growth rather than a roadblock to your dreams.