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6 factors to consider when comparing student loan companies

Note that the student loan situation has changed due to the impact of the coronavirus outbreak and the relief efforts of the government, student loan lenders and others. Check out our Student Loans Hero Coronavirus Information Center for news and additional details.

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If you are considering borrowing student loans for college, it is essential to understand the difference between federal and private loans. And there are many differences, from the typical interest rate of different student loans to their special benefits and credit requirements.

Most students should borrow federal loans before turning to private loans, due to their relatively low rates and flexible repayment options. But if you need additional financing, you can choose to borrow from a private lender. And here there are big differences too, depending on which company you are borrowing from.

To help you in this very important decision, let’s discuss …

Choosing between federal student loans and private student loans

First of all, you should look to federal student loans to finance your education. Federal loans may be a better option for students because:

  • The government pays interest on federal subsidized loans while you are still in school.
  • Federal loans have fixed and non-variable interest rates. Your monthly payments will therefore not change.
  • The typical interest rate on federal student loans is lower than what you’ll get on a private student loan. For the year 2020-2021, the subsidized and unsubsidized direct loans for undergraduate students have an interest rate of only 2.75%.
  • Federal student loans offer flexible repayment options, including income-based repayment plans. This means you can keep your payments affordable.
  • Some students may be eligible for federal loan exemption after 10 years of working in skilled public service jobs.

Carefully compare the differences between federal and private student loans before deciding which option is best for you.

Choose between different private student loans

If you’ve borrowed all you can on federal loans, private student loans might be your second best option to cover the remaining tuition fees.

If you have to rely on private funding, compare these six key criteria to see which company offers you the best deal:

1. Typical interest rates on student loans
2. Loan repayment terms
3. Repayment options at school
4. Co-signer rules
5. Loan fees
6. Customer service

1. Typical interest rates on student loans

There is no typical interest rate for student loans when borrowing from a private lender, as private student loan companies offer a variety of rates. And most lenders let you choose between variable rate and fixed rate loans.

With variable rate loans, your interest rate can change over time. This means that your monthly payments can change. So if the interest rates go up, you could end up paying more for your loan.

However, with fixed rate loans, your rate stays the same for the life of the loan. Usually, the interest rate on a fixed rate loan is higher than the initial rate offered on variable rate loans.

For example, the fixed rates on Citizens Bank private student loans have a 4.18%11.70%range. College Ave fixed rates operate at 2.99% Р12.99%. Variable rates, on the other hand, are 1.16%11.02% at Citizens Bank and 0.99% Р11.98% at avenue du Coll̬ge.

While a low-interest loan is usually a better deal than a higher-rate loan, you should consider the whole package, including the repayment term and other costs associated with the loan.

2. Loan repayment terms

Another important factor when comparing private student loan companies is tenure. For example, College Ave offers repayment terms for 8, ten, 15 years.

A shorter repayment term means that it will take you less time to pay off your loan. This usually means that you will pay less interest on a short term loan compared to a longer term loan. However, your monthly payments will be higher on a short term loan because you are making less.

You often have to choose between smaller monthly payments with a longer loan term or larger payments with a shorter term.

3. Repayment options at school

Paying off loans while in school can help save you money on interest, but it is not economically feasible for many students. Private lenders have different rules as to whether loans should be paid off while in school.

Some of the common reimbursement options available to enrolled students include:

  • Full payments
  • Interest payments only
  • Fixed monthly payments of $ 25
  • No payment until you graduate and your grace period ends

If there is a particular repayment plan that you prefer, make sure the private lender that you are considering offers.

And make sure you understand the implications of each repayment option. If you don’t at least pay the interest while in school, for example, your loan balance will increase.

4. Co-signer rules

Unless you have good credit and earn a solid income, you will likely need a co-signer to qualify for private student loans. If a parent or other trusted family member co-signs your loan, they will also be responsible for the debt. This means that if you miss a payment, your co-signer will be on the hook.

In that case, you may want to consider a student loan company that offers co-signer release. This option allows your co-signer to be removed from the loan after making a certain number of payments on time.

If the release of the co-signer is important to you, make sure the loan company you are considering offers. However, there might be other ways to release a student loan co-signer.

You could refinance the loan on your behalf, for example. So, you may not want to rule out lenders who do not offer co-signer release.

5. Loan fees

Many private student loan companies do not charge a set-up fee or prepayment penalties. However, you should always check it out. These types of fees can dramatically increase the cost of your loan.

Note that federal student loans come with an origination fee.

6. Customer service

You will work with the student loan company of your choice for many years as you pay off your debt. So it makes sense to check your reputation with other borrowers.

The Consumer Financial Protection Bureau (CFPB) maintains an online complaints database where you can read consumer complaints about student loan companies. The CFPB also periodically publishes reports highlighting the problems consumers have encountered with repairers.

Reading the experiences that others have had with loan companies can help you make a more informed decision about where to borrow money.

Choosing the best student loan companies for your situation

Take the time to research student loan interest rates and other factors. You can compare a wide variety of different lenders on our Private Student Loans Market page and elsewhere to find the one that offers you the best deal for financing your education.

Start looking for loans as early as possible so that you can find a suitable lender for you without being rushed by tuition payment deadlines.

Rebecca Safier contributed to this report.

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