Student Loans

Part of the financial aid package for most families sending a student (or two) off to college is the student loan. Student loans are a special category of consumer loans to be used only for college expenses, such as tuition, room and board, books, and even other supplies.

Most schools have excellent processes for helping students find the right loan or loans for their borrowing needs. After completing the FAFSA, or Free Application for Federal Student Aid, and any other forms that might be required by the school, the college or university will send the student a financial aid award package, outlining the type of aid being offered and how to apply for each kind.

After exhausting the “free money” part of the award – namely, scholarships and grants – and using the family’s allocated savings, investments or income to pay for college expenses, many students need to borrow money to make up the rest of the overall cost of college attendance. Students should always start with the federally-backed or funded loan types – such as Perkins, Stafford/Direct Loans, and PLUS loans for parents. All of these loans have fixed interest rates and lower (or no) credit score qualifications for borrowers.

That being said, most of these federal student loans have limits – students can only borrow specific dollar amounts depending on their need or their year in school. PLUS loans are the exception to this rule – but many parents decide they do not want loans in their name or they want the student to be responsible for repaying the loans after school.

After federal loans, the next option for students and their families are private (sometimes called “alternative”) loans. These loans are often seen advertised on television, in mailings, and on billboards. Private loans are backed by private banks, credit unions or other lending companies and often have competitive rates and “borrower benefits.”

With the exception of schools that participate in the Direct Lending program (where the loans come directly from the government through the school), colleges and universities frequently work with lenders to provide all of these loans to their students. When offered a choice among loan types or lenders, students and their parents often are confused or overwhelmed. Here are a few tips for making these decisions.

Know all of the loan options – It’s important to investigate many different loans before applying to get the best arrangement for each borrower’s needs. Be sure to shop around.

Look beyond the annual percentage rate (APR) – There are many other factors to consider, such as the total cost of the loan, deferment period, and the first payment due date. For federally-backed loans, the interest rate is fixed, but lenders differentiate themselves with borrower benefits that can bring down the total cost of the loan or the monthly payment.

Find a co-signer for private loans – Many students worry about not being approved for a loan because they do not have a co-signer. This is usually a hard and fast requirement for certain types of loans. A borrower may not be approved without one, especially younger students without credit histories. And, better rate / fee combinations are usually available only when applying with a credit-worthy co-signer.

Confirm loan details with the lender – It’s important to confirm interest rates, fees and other loan attributes, such as borrower benefits, with a lender before committing to the loan.

Pay attention to how and when the money is disbursed – Be sure to confirm if the lender sends the borrower the funds, or if they will go to the school directly. This is important because confusion over where the money has gone can delay settling your account. Also understand how long it will take to process a loan application. The turnaround time can vary between lenders and when students are up against due dates for tuition bills, this can make a huge difference.

Ask if the lender uses a “servicer.” A servicer is a separate company that handles the details of processing and collecting loan payments, customer service questions from borrowers, originating the loan, and more. Borrowers are often confused when they think they are taking out a loan from Company X, but then get paperwork from Company Y. Borrowers should communicate with the servicer and not the lender with questions, address changes or any changes to the student’s status.

Find out if the lender will capitalize the interest on the student loan. Some lenders will take the interest that is accrued when a student is in school and not making payments and add it to the principal, or the original borrowed amount. This usually only applies to unsubsidized federal student loans and private student loans. Capitalization increases the amount owed and the amount of each monthly payment. Some lenders capitalize the interest every three or six months, or once a year. The least expensive option is to find a lender who will capitalize the interest only once.

Learn about repayment assistance options. Look for a lender that will help manage your money with a variety of options for payment plans and repayment assistance. Graduated repayment is one option that means your monthly payments start out lower and increase as you earn more money. Forbearance is a deferment of your loan payments if you cannot make them, due to extenuating circumstances.

Choose a lender with good customer service. Remember that you are the customer here – in most cases, you have plenty of options from which to choose for a lender and student loans are a big commitment. Make sure to find a lender who you can reach with a toll-free telephone number or fast online assistance available 24/7.