It used to be that federal student loans were always the better choice over private loans. However, in recent years, private loans have started offering rates at half the rate of graduate school and parent loans.
But it’s still difficult to compare private student loans in the same way you’d compare bank loans because they often have special perks. For instance, in order to mirror the flexible payment terms of federal student loans, one student loan lender may offer a program with guaranteed payment breaks during periods of unemployment while another may not. The lender may also offer breaks from payments for a shorter time period.
Try these tips to compare both your federal and private lending student loan options for students and parents borrowing new loans, as well as graduates refinancing for cheaper rates.
Use sites like credible.com to compare rates.
Unlike the federal government, each lender and even each loan can offer a different interest rate. Plus, there are dozens of lenders to choose from. To avoid random google searches to find a lender, use a comparison tool like credible.com to compare rates. From the home page, click on the type of lending you’re looking for: new loan to go to school or student loan refinancing.
Read fine print as far as terms for payment breaks.
Federal student loans have guaranteed breaks from payments when you meet economic or other qualifications. Each private lender has its own programs and rules for taking a break from making payments due to an economic situation. For instance, one lender may offer up to 24 months of guaranteed forbearance in the case of unemployment while another one may offer 12 months. Offering any is up to their discretion. Make sure you read their rules before taking out a loan to insure you have the options you need. However, if you are refinancing for a lower rate and have significant savings in your bank accounts, you can focus more on just who offered you the best interest rate or other services.
Borrow traditional federal student loans for undergraduates first.
Traditional federal student loans are subsidized and unsubsidized loans issued directly to students. These loans have an annual limit and a total limit per degree. For instance, for undergraduates in 2017/ 2018, the limit ranges between $5,500 and $7,500. Subsidized limits are $2,000. Both subsidized and unsubsidized loans have interest rates at 4.45 percent for undergraduates, which makes them well worth it with the special breaks payments due to economic situations, possibility of partial loan forgiveness if the student works in public service post graduation, and subsidized loans offering interest free time periods such as when in school at least half time. If refinancing these types of loans, consider what you are giving up carefully and make sure you talk to your current loan servicer about all your repayment plan options first.
Consider different options for refinancing graduate loans, parent loans and private loans.
Federal student loans for parents and graduate students are issued at much higher rates than traditional federal student loans to undergraduate students. Currently these rates start at 6 percent. When you have these loans, private student loans can cut your payment by a third or more.
Don’t get discouraged if you don’t qualify for a low interest rate now.
Rates on student loans, whether for a new loan or refinancing, not issued by federal student loan lenders vary based on items such as credit score. The good news is your credit score can improve quickly and you can reapply in a few months. Try these easy steps: pay everything on time, work on getting credit card balances as close to being under 25 percent of your limit, and avoid opening new lines of credit before you reapply for your loan. One more easy way to build good credit is to get added to your spouse or partner’s credit card as an authorized user that has a low balance and impeccable payment history. You’ll take on their credit history attached to that card. Give yourself at least three months after paying down balances and doing other positive actions before reapplying.
Understand cosigner responsibility.
Cosigning a loan happens when the individual who needs to borrow the money doesn’t have the credit or income required to qualify. Thus, another person who does have good enough credit and income cosigns the loan with them and shares responsibility. For instance, an 18-year-old student beginning college would need a parent to cosign if borrowing a new loan for college through a private lender. The catch? Many borrowers and cosigners don’t understand the cosigner is named on the loan and will have any late payments reported on their credit report. It’s very important a cosigner makes sure they budget for payments in case the borrower can’t make payments at some point in the future.
Look for welcome perks and referral bonuses.
Private student loan lender SoFi offers a welcome bonus such as $100 or enough miles for two free plane tickets. You also can get referral bonuses by introducing Sofi to your friends. Referral bonuses are generally in the $200 to $300 range and are paid for each person who signs up for a new or refinanced loan through that link. Credible.com also offers referral bonuses.
Ask detailed questions about customer service, including career services options.
SoFi and CommonBond are unique in offering programs for career services to borrowers up to actually finding an unemployed borrower a job. They also host networking happy hours across the country for borrowers to gain the contacts needed to advance in their careers. When calling any lender, whether or not they offer career services, ask questions about the loans such as repayment terms. Think about how well the customer service representatives were able to answer your questions. Especially, when you are offered the same interest rate by two different companies, customer service may make the difference. Why? If a payment is incorrectly processed in the future, you have a much better chance of the problem being fixed quickly with good customer service.
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What you need to know about student loans before you borrow
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