If you need to borrow to pay for college, graduate school, medical school or trade school, your first choice should be federal student loans. Even if a private student loan interest rate is more competitive than a federal loan, there are other advantages to borrowing from Uncle Sam, including income dependent repayment plans, Public Service Loan Forgiveness, deferment, forbearance and forgiveness under Income Based Repayment or Pay As You Earn. But, in some cases, you may need to look to private student loans if federal loans won’t cover the amount you need to cover your college costs.
If this is your circumstance and you simply must turn to private student loans, it’s important to make the best choice of loan and lender. Check out these 5 tips for shopping for a private student loan:
#1 Max out federal loans first
As we wrote above, these offer more flexibility and more options if you have future financial problems and need to pursue alternate repayment plans. Also, if you are considering teaching or other public service work, federal loans can be forgiven, while private loans cannot. Even if the federal loans offer a slightly higher interest rate, the advantages will more than make up for it. You must also consider the total cost of the loans, including origination fees – federal loans typically charge less for these.
#2 Don’t blindly accept a suggested lender
Don’t blindly take the word of your college’s financial aid office that the lender they recommend (if they do suggest one) is the one you should use. They may have a partnership with that lender that benefits the school, but may not benefit you. It’s your debt, choose it wisely. But you should still hit up your financial aid office and ask what private lenders other students are using, what interest rates they’re getting and what their experience has been – but then finish your research independently.
#3 Compare lenders
Not all private lenders are the same. You’ll want to consider different lenders to see which offer the most advantageous interest rates, which offer flexible repayments and which have the best reputation for dealing fairly with borrowers. Be sure to check the Consumer Financial Protection Bureau’s roster of comments and complaints on private lenders so that you can verify the ease (or difficulty) of dealing with a lender before you sign on the dotted line.
#4 Compare rates with a co-signer
Because you’ll likely have little to no credit when you start taking out student loans, you’ll be offered a more competitive rate if you can get a co-signer. Your parents (or grandparents) may have no problem committing to cover you debt, but if something happens and your finances don’t allow you to service that debt, they’ll be left holding the bag. So think hard before you ask someone to co-sign. Also look for lending programs that offer co-signer release after you make a number of on-time payments.
#5 Minimize what you borrow
No matter if you’re borrowing federal or private loans, you should borrow the minimum you can at every step of the way. That means working part time while in school, full time during the summer and either paying cash for some of your costs or applying the money you earn to paying interest to prevent it from accruing and capitalizing while in school and, if possible, paying down some of the principal, as well. The less you owe when you graduate, the better.
To make sure you know how much you owe at every step of the way, sign up for Tuition.io’s free student loan tool. With this, you can view all of your loans – both federal and private – on one simple-to-understand dashboard and see what your total debt is and what your monthly payments will be to service your debt.