How Do You Choose a Student Loan?

Note: This story is sponsored by College Ave Student Loans 

Say what you will about the government, but when it comes to lending out money to pay for college, its terms are pretty attractive. 

Federal Direct Subsidized Loans (formerly known as Stafford Loans) are the gold standard among the crop of borrowing options. Uncle Sam pays the loan interest while you’re in school, during the grace period and when the loan is in authorized deferment. On top of that, subsidized federal loans have a low fixed interest rate for the entire life of the loan (currently 4.53%) that doesn’t depend on you having a pristine credit record. They also offer certain benefits, such as income-based repayment plans, that are unique to federal student loans. 

If you’re ineligible for a Direct Subsidized Loan or want to augment the amount you borrow, federal Direct Unsubsidized Loans offer the same low, fixed interest rate, and flexible repayment options. Like Subsidized Loans, approval and loan limits are based on financial need. However, unlike Subsidized Loans, interest starts accruing while the student is still in school. 

Direct Subsidized and Direct Unsubsidized loans are the most common type of federal student loans. There’s just one thing: Even if you’re approved to borrow the annual maximum amount Uncle Sam offers, it’s often not enough.  

Plan on subsidizing with private loans

The maximum amount a freshman is eligible to receive in federal subsidized or unsubsidized loans is $5,500, with the amount increasing $1,000 per academic year until it tops out at $7,500 for years three and beyond.

Compare that to the actual costs of college, and you can see how wide the funding gap can get: 

The average annual tuition and fees for the current academic year is $10,116 at a public in-state school, $22,577 at a public, out-of-state school and $36,901 at private university, according to U.S. News’ latest data. 

Once you’ve exhausted your federal loan options in the student’s name first (as well as scholarships and grants), it’s time to jump into the world of private student loans. Smart comparison shopping will help you avoid getting stuck in an untenable debt situation.

How to compare private loan options

Private lenders allow you to borrow up to your full cost of attendance. Look for ones that offer competitive interest rates and flexible repayment plans. Also note that unlike federal loans, many private loans may require the student to enlist a co-signer who is also on the hook for the debt. 

From the borrower’s perspective, the best student loan is the one with the lowest cost. That’s based on the initial loan amount, interest rate, the loan term (how long you have to pay it back), and loan fees. Making sure you shop around for the best rates and flexible repayment plans is important, and you can find all that at College Ave Student Loans along with great customer service. Check out College Ave’s student loan calculator to see how much you can save. 

Here’s what you should keep in mind as you compare private loan options:

Interest rate: Rates vary by lender and, boy, they vary greatly — from 4% up to 15%. Typically, fewer than 10% of borrowers qualify for the lowest rates. You can increase your chances of qualifying for a low rate by making sure your credit or your cosigner’s credit is in tip-top shape well before you start applying for loans. Some lenders, like College Ave, have a pre-qualification tool that helps potential borrowers see if they qualify and what rates they can expect before applying.

Another comparison shopping point is whether you want a fixed or variable interest rate. A fixed rate gives you security in knowing exactly how much you’ll pay over time. A variable rate will likely be lower at first (and maybe always). But it will move over time based on the broader interest rate environment. 

Loan term: Ten years is the standard repayment term for federal loans, but private lenders are much more lenient, offering repayment options up to 20 years. Although your monthly payments may be lower, the total out-of-pocket cost of extending those interest payments can add up. 

Loan fees: Some lenders charge one-time setup fees (aka origination fees) based on the amount you borrow. It’s important to know how much those are and factor them into the total price you’re paying for the loan. College Ave doesn’t charge any origination fees.

As you research options, keep a student loan calculator handy to compare your options. 

Here’s an overview of the differences between government and private student loans:

More on HerMoney:

• Should I Get My Master’s Degree? My School Debt Will Be $40,000
• A Simple Trick to Get Out of Student Loan Debt Faster
• HerMoney Podcast: Bonus Mailbag: College, Education and Student Loans

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