If you have plans for higher education after high school, you need a way to pay for it. The average graduate leaves college with $37,000 in debt. That’s a big debt to start adulthood with – but it’s necessary to get the education you need.
Before you take just any student loan offered to you, learn about the best student loan companies, what to look for, and how to apply for top student loans.
What is a Student Loan?
A student loan is money you borrow from the government or a private lender to pay for college (tuition, room, and board, and various other fees). Student loans are unsecured loans and they often have grace periods so you don’t have to make payments while you’re in school.
How do Student Loans Work?
Every student must complete the Free Application for Federal Student Aid to be considered for any student loans. Even if you want to work with private companies, start with the FAFSA form before exhausting other options.
Whether you secure federal or private student loans, you sign a promissory note. The note ‘promises’ you’ll make your payments as detailed in the paperwork. Most student loans have deferred payments, meaning you don’t have to make payments as long as you are at least a part-time student.
Once you graduate (or stop going to school), the payments begin. Interest accrues as soon as you make the loan, though, so if you can afford interest payments while in college, it’s a good idea to get ahead of the payments by paying the interest.
Private student loans work differently than federal loans, so make sure you know the difference. You may not get all the funds you need from the government. Even students with scholarships and grants often have to supplement their education expenses with the best private student loans.
How Do Student Loan Interest Rates Work?
Student loan interest rates usually vary between 4.5% - 8% depending on the lender and your qualifying factors.
The more positive factors you provide the lender, the lower the interest rate you’ll receive. Lenders base your interest rate on the following factors:
- Credit scores – Anyone on the loan (parents or yourself) should have a credit score. Lenders use the credit score to determine your likelihood of paying the loan back. The less risk of default you pose, the lower the interest rate lenders offer.
- Loan amount – The more money you borrow, the higher the risk you pose to the lender. For example, lending $10,000 is a lot less risky than lending $50,000. The more expensive your college, the higher the rates you may pay, unless you have great credit.
- Loan term – The shorter the loan term, the less risk the lender takes. The average student loan has a 10-year repayment term. Choose a longer term, and you’ll see your interest rate increase.
What’s the Difference between Federal and Private Student Loans?
It’s important to understand the difference between federal and private student loans. Federal loans are from the government. Once you complete the FAFSA, the Department of Education will determine which loans you qualify for and at what rates and loan amount.
If you don’t get all the financing you need, or you want to go the private student loan route, you can look for the best student loan lenders online. Today you have hundreds of options when looking for the best student loan.
Besides the bank the loans come from, there are a few more differences:
- Federal student loans always have fixed interest rates
- Federal student loans offer various repayment plans, including an income-based repayment plan that bases your monthly payment on your annual income (reviewed each year)
- Private student loans are underwritten and funded by private banks and financial institutions
- Some private student lenders require payments while you’re in school
- Private student loans may have variable interest rates (many have fixed too, you just have to shop around)
- You typically need good credit or a cosigner for private student loans
How to Apply for a Student Loan Online
If you’re looking for private student loans, you’ll fill out a student loan application with each lender. Before you apply, look at the qualifying requirements, available loan amounts, and potential interest rates.
Because private lenders have their own programs, they charge their own fees too. You’ll likely find vast differences among the programs. Find the programs that fit your budget and needs before applying.
We recommend applying with at least 3 banks or financial institutions. Compare the offers and see which one is the most affordable. Don’t focus on the APR, loan amount, or monthly payment. Instead, look at the big number – what will the loan cost overall?
That’s the number you want to focus on. Borrowing $30,000 may not seem like much, but when you compare different programs offered, you may find at the end of the term that one costs $40,000 after interest costs and the other $55,000 – that’s a tremendous difference.
Most banks and financial institutions have student loan applications online. You’ll need your personal identifying information (birthdate, social security number, etc.), your income, your parent’s income (if they are cosigning), and any asset information. Most banks offer instant answers or at least send you quotes via email within a day or two.
How to get the Best Private Student Loans without a Cosigner
If you’re ready to be independent and want student loans without a cosigner, you’ll need to build up your credit. Private student loan lenders need proof of a credit history. As a young adult, you may not have much credit yet, but here are a few quick ways to build it up:
- Get a secured credit card. Your credit line is equal to your deposit. Lenders use the deposit as collateral. If you default on your payments, they keep the deposit. If you’re trying to build credit, though, make sure you make your payments on time.
- Get a department store credit card. Kohl’s, Macy’s, and Dillard’s all offer store-branded credit cards with flexible guidelines. They are a great place for young adults to start building credit. Use it to pay for things you’d normally buy and pay the bill off in full to get the credit.
- Use Experian Boost. Experian offers a free program that tracks your utility and cellphone payments for ‘credit.’ If you make your payments on time, they can add up to six months of payments to your credit history to ‘boost’ your score.
How to Choose the Best Student Loan
Looking for the best student loan is a big job. Before you start, know these tips:
- Look at the fees. Student loan companies always charge fees. Getting familiar with them is important. Do they charge an origination fee? This is usually a percentage of your loan amount. One point, for example, is 1% of your loan amount. Some banks also charge application fees. Look at the bottom line to see what the loan will cost.
- Look at the repayment terms. Make sure you can work with them. For example, if the lender requires payments right away, even while you’re in school, can you afford it? Do you need a loan with deferred payments until you graduate?
- Look at the interest rate. Don’t focus on the interest rate, but make sure it’s a fair rate. It’s a piece of the puzzle at the least. You don’t want to overpay for interest when other lenders may offer lower rates, but don’t let it be your only deciding factor. Combine the interest rate with the fees and look at the big picture.
- What are the repayment options? Finally, ask about repayment options. Private student loans have fewer options than federal loans. Can you make smaller payments when you first graduate or do you go right into full-blown repayment when you leave school?
Find the Best Student Loan Companies for your College Education
No one should avoid college because they can’t afford it. There is a lot of help out there today, especially when you look at the best student loan companies. You’ll find loans with affordable interest rates, low fees, and repayment terms you can afford.
Do your homework and look around. Federal student loans may help you get started, but they often aren’t enough to fund your entire secondary education. If you want the best terms and the most affordable options, look at the student loan companies that do it best – helping students get the financing they need for many years.