For students searching for college funding, navigating the wide world of student loans is a
task almost as difficult as college itself.
To make sure your deal truly is as good as it looks on paper, here are the most important steps a
student should take before signing a loan agreement.
Steps to take before signing
1. Go to the feds first
2. Enlist your parents
3. Shop around
4. Evaluate the benefits
As a rising number of students turn to loans to help them foot hefty tuition bills, the number of
lenders, loan packages and financing options has grown as well, giving students a greater
challenge when it comes to finding the best loan deal. The National Center for Education
Statistics reports that more than two-thirds of all four-year undergraduate students take out loans
in order to fund their educations.
Go to the feds first
Despite the rise of lenders from every corner of the nation, Uncle Sam is still the largest provider
of both free and borrowed cash for students. Before contacting private lenders, students should
fill out the Free Application for Federal Student Aid to see what type of federal aid they can
land. The information on this application will determine the expected family contribution, or
EFC. The "free" money is in the form of grants, such as a Pell Grant or a Supplemental
Educational Opportunity Grant , or SEOG.
Only after students have exhausted their free money possibilities should they seek loans, again
turning to the federal government first. "Federal loans are safer and almost always cheaper than
private loans," says Lauren Asher, associate director of the Project on Student Debt. "(Federal
loans) come with some borrower protections, fixed interest rates, possibility for deferral."
Federal Stafford and Perkins loans have low fixed interest rates of 6.8 percent and 5 percent,
respectively. These are significantly lower than private loan rates, which typically hover around
11 percent, says Justin Draeger, assistant director of communications for the National
Association of Student Financial Aid Administrators. Additionally, Draeger says, federal student
loans aren't tied to credit history, giving students with little to no credit the same access to
college funding as their wealthier counterparts.
If you aren't eligible for a federal loan, you'll have to research private loans carefully. "Private
loans are a whole other matter," Asher says. "The terms can change, the interest rates can
fluctuate, the interest costs can quickly surpass whatever you borrowed, and they can be branded
in ways that can be hard to tell what you borrowed."
Students can begin their research using Bankrate.com's student loan rate comparison, which is
updated weekly.
Before turning to private lenders, try turning to your parents instead. The federally funded Parent
Loan for Undergraduate Students, or PLUS loan, allows parents to borrow funds for their child's
education. Like the Stafford and Perkins loans, PLUS loans have a capped interest rate (at 8.5
percent); maintain many of the same borrower protections, including deferred payment until after
graduation, and are available regardless of financial need To qualify, says Sallie Mae
spokeswoman Martha Holler, parents must pass a simple credit check. PLUS credit checks are
significantly less stringent than those for private loans. "It's just to make sure you have no
adverse credit history, which means that nothing is past due," Holler states. "The PLUS loan is
designed to be quick and easy to get."
Should your parents not qualify for a PLUS loan, you may be in the running for additional
Stafford funding.
After you know what kind of loan you'll need, it's time to take a close look at loan providers.
While your college or university will probably provide you with a list of preferred lenders, that's
just a starting point, says Brent Tener, president of the Southern Association of Student Financial
Aid Administrators. "No matter what type of loan they have, students need to do a good job of
comparison shopping, reading the fine print and asking questions," he says. "Before you sign,
you can always check with the Better Business Bureau to make sure the company you're working
with hasn't been cited recently."
The relationship between preferred lenders and many colleges and universities has come under
fire recently from New York State Attorney General Andrew Cuomo. He is investigating
potential conflicts of interest between lenders and numerous colleges, and some have already
agreed to pay a settlement and change their practices.
Research is required, Tener says, because lenders, even those disbursing regulated federal loans,
vary tremendously in terms of loan perks and quality of service. When searching for a loan
provider for either federal or private loans, Holler recommends asking potential lenders what
they're willing to give for free.
"The first question to ask is 'Do you provide fee-free loans?' If you shop around, you can find a
lender that will pay the origination fee and federal default fees on your loans," she says. "The
second question is to ask what types of benefits they offer."
Evaluate the benefits
Draeger recommends evaluating loan benefits based on your projected payment behavior. If
you're the type of borrower who's likely to pay each and every bill on time, check out benefits
that will kick in during the lifetime of the loan, such as an interest rate reduction after a certain
number of payments or your last few months free as a reward for making all of your payments.
If there's a chance that you'll miss a payment, experience a prolonged job hunt or go into a field
with low starting salaries, stick with a lender that offers upfront benefits that will last the lifetime
of the loan, such as an interest rate reduction when payment begins or a rate reduction for using
direct debit.
"Benefits can amount to a couple of thousand dollars over the course of a loan, so it's important
for students to take the time to fully understand their loan product," Draeger says. "Students and
parents are often times exasperated by the time they get to the loan process, but rushing through
is a costly mistake."