As you eagerly await the start of college, you may still be figuring out how you will pay for it. If there's a gap between what you can afford with savings, grants and scholarships and the total cost of college, you can look for student loans to help cover the rest of the expenses.
Federal student loans are made by the government and their interest rates are the same for all borrowers. But if you're considering private student loans, which are made by private lenders and banks, there are a variety of factors to look at when comparing your options. One of the most important factors to consider is the interest rate because it affects your minimum monthly payment and overall loan cost.
However aside from using the Annual Percentage Rate (APR), there is no consistent way private student loan lenders advertise their rates, which can lead to confusion and make it hard to compare rates. Here are four tips that can help you understand the different types of interest rates, how to look beyond advertised rates and how to qualify for a lower rate.
Tip 1: Understand Fixed and Variable Interest Rates
When you take out a private student loan, you may be able to choose between a fixed or variable interest rate. Fixed rate loans tend to have more stability because the interest rate won't change over the lifetime of the loan. You can plan and budget for the same monthly payment each month, which is helpful.
Variable rate student loans tend to have a lower starting interest rate than a fixed rate loan. However, since variable rates are tied to an index, such as the London Interbank Offered Rate (LIBOR), they can increase or decrease over the life of your loan. Every time your interest rate changes, which can be quarterly, your monthly payment can change too, making it harder to budget over time.
Tip 2: Look at the Range of Interest Rates
Private lenders advertise a range of rates, and you won't know what rate you will receive until you apply. When determining your interest rate, lenders will evaluate several factors, such as credit score, income, credit history and debt-to-income ratio. The better your credit evaluation, the better your rate will be. Since lenders use different criteria when assigning interest rates, you could receive one lender's lowest rate and a different rate from another lender.
Tip 3: Read the Fine Print
Sometimes lenders include an interest rate discount or certain loan terms in their advertised rates. For example, some lenders give borrowers a lower interest rate if they are already a customer (i.e., loyalty discount) or enroll in auto debit payments during repayment. Keep in mind that if the auto debit discount is factored into the advertised rate, this discount won't kick in until you have entered repayment, which is likely after you graduate.
The advertised rate may also factor in that you'll start to repay the loan while in school or that you'll agree to a shorter repayment term (which can increase your monthly payment). So even with perfect credit, you may not qualify for the advertised rate if you don't also agree to these other terms.
Reading the fine print when you are comparing private student loan rates and looking at the monthly payment amounts could help you make a better apples-to-apples comparison. If your plan includes an interest-rate discount or one of the shorter-term options, be sure you can qualify for the discount and that your budget will allow for higher payments.
Tip 4: Add a Cosigner to Help Lower Your Rate
Many undergraduate students haven't established a strong enough credit history to qualify for a student loan on their own. Adding a creditworthy cosigner to your application can improve your chances of getting approved for a student loan and may get you a lower interest rate. Even if you qualify for the loan without a cosigner, adding one could decrease your rate. Similar to how lenders review your information, the lender will analyze the cosigner's credit score, credit history and other pertinent information to determine the interest rate.
Make an Informed Decision
Many students take out loans to help fill a funding gap for their college education. When you're considering private student loans, compare lenders and interest rates. By understanding what could be factored into the advertised rates, you are better able to compare your options and make the decision that is best for you.