Before obtaining a loan for financing your college education, it is advisable to dedicate some periods to learning about various loan options and costs available. This assists you to assess their pros and cons so that you can choose the ones that best suit your needs.
Therefore, in this post, we will explain how you can compare varying student loan options and costs.
Know the different types of student loans
Basically, if you are looking for ways to get student loans, there are two basic options you can consider. These options are federal student loans and private student loans. You need to understand how the two options work before signing an agreement to obtain any student loans.
- Federal student loans
Federal student loans are loans provided by the federal government to students having difficulties with financing their education. When compared to private student loans, federal student loans tend to be more affordable as their interest rates are usually lower. Some federal student loans may be subsidized whereas others are not. However, in many places, it often takes a long time before a student can get a federal loan.
- Private student loans
These are loans provided by private/non-government lenders to students that need assistance with sponsoring their college education. These non-government lenders include banks, schools, credit unions, online lenders, and state agencies.
Private student loans work like mortgages, car loans, personal loans, etc. as a borrower has to contact a lender to see if they qualify for the loan or not. Once they are eligible for the loan, they may be required to have a consigner, credit review, income review, and so on.
Look for various lenders
Whether you are taking a private student loan or a federal student loan, you must realize that each type comes in different forms. For private student loans, various lenders offer varying offers to their customers. The interest rates, loan terms, loan fees, etc. often differ from one private lender to another.
Therefore, you shouldn’t just go for the first lender offering you a loan. You need to check out the various loan offers from different lenders. This makes it easier for you to compare the offers and decide the best one for you. If you see any red flags in the offer of a lender, don’t hesitate to avoid such a lender.
Check the total student loan costs
When getting a student loan, many students usually focus on the actual loan amount and interests. Unfortunately, several other fees may affect the total student loan costs that you have to pay back. Therefore, another crucial thing you must do when you want to compare different student loan options is to consider the total loan cost.
Put simply, the total loan cost refers to the total amount of money that you will have to pay at the end of the loan term. This amount relies heavily on the interest rates and fees of the loan. It is the most important figure you need to know before signing any loan deal with a lender.
The total loan cost = Loan Amount * Interest rate * Term + Fees.
Below, we will explain each parameter that makes up the total loan cost.
Assess the interest, term, and fees of the loan
- Interest
As you are getting a loan from a lender, you would have been shown the interest to be paid on the loan amount. In simple words, the interest is regarded as the cost of taking a loan from a lender as it is the amount charged for offering you the service. It is a particular percentage of the amount owed. Over time, the interest adds to the total amount you have to pay back.
As you compare loans, make sure you go for loans with low interest as this will reduce the total loan cost.
- Loan fees
You may also have to pay certain fees on the loan. The most common fee is the loan origination fee. The fee is paid upfront as you are obtaining the loan from the lender. In most cases, the loan origination fee represents a specific percentage of the loan amount. Also, it is a one-time fee.
The origination fees for most types of federal student loans vary from about 1.07% to 4.27%. Also, some private lenders charge a similar percentage for origination fees. However, numerous private lenders don’t require you to pay an origination fee.
- Loan term and monthly payment
You are expected to pay back a student loan within some months or years. So, the period for repaying the loan is known as the loan term. There is no rule for determining the best loan term, but you must be certain that you can afford to repay the loan within the agreed loan term. Also, you must know that the longer the loan term, the higher the overall cost of the loan.
In addition, you should consider if the agreed monthly payment plan is suitable for your projected realistic income after graduation or not.
Check the lender’s reputation
Once you have ascertained all these important factors, you need to assess the reputation of the lender. Is the lender trustworthy? What do the customer reviews say about the lender? These are important questions you must answer as you compare different student loan options.
After doing the things above, you should be ready to take a student loan.