Student loans supplement your income while you attend school. Student loans help pay for your living expenses, tuition and books so that you can continue to focus on your studies. Private student loans bridge the gap between what you receive in federal student loans and financial aid and your income. Often, these loans are part of a federal aid package, which could consist of other financial aid, like grants and work-study options.
How Student Loans Work
The plan you decide to use to pay for college can have a big impact on your life, almost as big of an impact as the major you choose to pursue. There are two types of loans designed to help you pay for college: federal and private loans. Commercial lenders provide private loans, also known as alternative loans. Like every other type of loan, these debts must be paid back and oftentimes have steep interest rates.
Additionally, you must qualify for loans from private banks, just as you would for any other type of loan. If you have bad credit or no credit, you must have a co-signer on your loan. This means whoever signs for you is just as responsible for paying back the loans on time as you are because their credit is at risk.
Student loans differ from other types of loan in that they offer deferments. This means in most cases, you do not have to start making payments on these loans until after you have finished your schooling; however, this is not a feature found across the board, and some banks require small payments while you are still in school. You can find more detailed information in our articles about student loans.
Deferred Payment
When you defer payment, you make no payments while you are in school. If expenses are tight, this might be a good option until you graduate. However, most private loans accumulate interest while you are in school. This accumulated interest is then added to your loan's lump sum when you graduate.
In-School Payment
If you can afford it, you can make payments while you are still in school. In general, these payments are low – about $25. These in-school payments pay down the interest on your loan so it is not added to your loan after you graduate.
Changes in Student Loans
There have been multiple transitions in the student loan industry in the past few years and changes are ongoing. During his tenure, President Obama signed student loan reform into law. These reforms attempted to make student debt more manageable and increased the maximum Pell Grant available by $1,000.
Previously, when you would start the federal student loan process, you would approach your school, fill out a FAFSA and indicate what institution you wished to house your federal student debt. Now the government has decided to house Stafford, Plus and Direct loans within the U.S. Department of Education. The government then contracted out the service of these federal student loans to different private companies.
Explore Your Student Loan Options
As college tuition continues to sharply increase, more students are taking out student loans for college and leaving school with large amounts of debt. When you do not have adequate funds to pay for college and the associated costs of living, getting a loan may be a good idea. However, before you take on any type of debt, it is imperative to explore the best options and find the borrowing program that fits your needs.
Federal Student Loans
Federal loans are the best option if you need to borrow money for school. Federal student loans are funded by the federal government and dispersed through the department of education. These loans are distributed to the school you are attending. Federal loans consistently offer loan deferment, allowing you to finish school before you have to worry about making payments. Federal student loans also offer fixed interest rates that are lower than rates private loans provide.
Additionally, federal loans are subsidized, and since they do not require a credit check, students who are less qualified financially can qualify. Furthermore, when it comes time to pay your loan back, you have more options, including an income-based repayment plan and loan forgiveness when you work in public service.
Private Student Loans
Private lenders encourage students to fill out FASFA to receive federal aid and to explore all of their federal aid options before pursuing a private student loan. If you have exhausted your federal loan options and still do not have enough money to make ends meet during school, you may pursue a private loan to fill in these gaps.
Private loans differ from federal loans in a few ways. These loans consider your credit score, employment history and income before approving you for a loan. They also may require a co-signer for your loan. Typically, private loans charge higher interest rates than federal lenders and have variable rates rather than fixed rates. Moreover, private loans do not offer the same options for paying back your loan.
Furthermore, while federal loans consider your costs and the assistance you receive before granting a loan, private banks do not. This means you can borrow more money than you require for school. Even though this may seem ideal in the short term, remember that all of this money, plus interest, needs to be paid back, and borrowing is the most expensive way to pay for your education.
Refinancing Your Student Loans
If you already have student loans for college and need to consolidate or refinance your debt, you have a couple of options you can pursue: consolidation and refinancing. Convenience and long-term savings are some of the main reasons for refinancing or consolidating your loans. Make sure to look for a refinancing plan that offers better interest rates than what you are presently paying and a plan that allows you to consolidate your loans into one monthly payment. For more, detailed information about these programs and companies that provide them, check out our Student Loan Refinancing and Student Loan Consolidation sites.
Student Loans: What We Evaluated & What We Found
To assess student loans, we carefully evaluated the types of loans offered, terms of those loans and repayment options. The information found on this article and on the matrix was obtained independently without influence or input from the companies on the site. Additionally, the companies did not receive information prior to publication.
Loan Types
The type of loan and the loan limits are two very important factors for choosing a college student loan. Each service on our lineup offers both undergraduate and graduate loans. These loans vary in their limits though. The average loan limit is about $65,000 while the lowest is $35,000, and one, Discover, has no borrowing limit.
Another important consideration is whether a company offers loan consolidation, which can help make your loan more manageable in the long term, saving you hassle and money.
Each company on our lineup offers both graduate and undergraduate loans, so these are not represented as check marks on our matrix. Other important attributes that we left off the matrix include no origination fees and the ability to apply online. You should expect each service on our lineup to have these traits and to offer both graduate and undergraduate student loans.
Loan Terms
The terms of your loan and the protections your lender provides you are a huge consideration. For example, does it offer career support or unemployment protection if you lose your job during the repayment period? In our testing, we found that SoFi offered both of these features, creating a safety net in case something goes wrong during your career search.
Another important thing to consider is the rates of the loan and if the company is willing to work with you and offer incentive programs to reduce these rates. Rates vary widely, and each service offers a range. Rates include variable rates and fixed rates.
Variable-Rate Loans
Variable rates are when the annual percentage rate (APR) you pay on the loan varies throughout your repayment period. In general, variable rates are lower than a fixed-rate loan; however, as these rates fluctuate, your payment amount changes. If the interest rates rise, your payments may be higher than a fixed rate.
Fixed-Rate Loans
Fixed-rate loans have the same APR throughout the life of the loan. Often, fixed rates are higher than variable-rate loans. However, this rate will remain the same through the duration of your loan, and you will not have to worry about your payments fluctuating.
These rates are based on various factors, like your credit worthiness and employment history. On average, rates vary from 2.66% to 8%, with the highest cap for variable-rate APR being 18% and the lowest cap being 9.95%. Subsequently, fixed-rate loans range from 3.63% to 12.99%.
Deciding which plan to choose is difficult, while the low interest rates of a variable loan make this an appealing option, a fixed-rate loan may be a better choice for the life of a loan since the market rises and falls in cycles. When choosing a lender, make sure to choose the company that offers you the best rates based on your credit worthiness.
Repayment
Each service on our lineup offers loan deferment until six months after you finish college or you are no longer enrolled more than halftime. The maximum amount of time you have to pay back your loan in another important consideration. Some services give you up to 20 years to pay back your loan, though the average is about 15 years. While some people may choose a 20-year loan with the intent to pay it off more quickly, it is important to remember that many companies charge a penalty fee if you do this.
Other important payment features to look for are auto-payments and auto-payment incentives, which means that companies give you a small discount for establishing automatic payments on your loan. Though it falls near the bottom of the lineup, Sun Trust gives one of the most generous automatic payment discounts at 0.50%.
In addition to the important features listed above, we also considered help and support options. Each service on the lineup provides phone assistance and FAQs on the company website. However, only a handful offer live chat, which is great for easy access, quick questions and immediate assistance.
Student Loans Verdict & Recommendations
While SoFi, Citizens Bank and Wells Fargo rose above the rest due to their low rates and extensive set of services, such as career support and unemployment assistance, other lenders we evaluated had stand-out features.
Sallie Mae, one of the most popular names in the college student loan industry, bases its limits on the cost of attendance for both undergraduate and graduate student loans. Additionally, SunTrust and PCN stand out for offering a 0.50% incentive for using auto-payment loans.
While most of the services on the lineup offer 15-year payment plans, only our number one, SoFi, and our number five, iHelp, offer plans up to 20 years.
When taking on any type of debt, it is important to get all of the information, understand the terms of your loan and meticulously study the terms of service associated with your loan. Look for companies that offer the best rates based on your credit worthiness and that support your choice for a repayment plan.