18 Factors To Consider: How To Choose The Best Student Loan To Pay For College Or Grad School

Are you indecisive about which student loan is the best for you? Here is what to consider to select a college student loan for 2022 for both federal and private student loans.

18 Factors To Consider: How To Choose The Best Student Loan To Pay For College Or Grad School

Student loans come in two types: federal and private.

If you’ve decided to take out a student loan, the key to finding the best deal comes down to comparing your options. By doing this, you’ll be able to find an affordable loan that comes with borrower-friendly repayment terms.

After comparing your options and terms before choosing a loan, then choose the one with the most favorable terms and find out when your first payment is due. That’s because unlike federal student loans, which offer the same interest rates and terms to all borrowers, private student loans all operate differently.

From one company to the next, you might have different options surrounding the interest rate, fees, repayment plans, and hardship programs. Every lender also sets its own eligibility requirements and standards for receiving the lowest rates.

Then you’ll want to figure out how much you need to borrow, and then which options are available to you at what rates. Then you look at any scholarships, grants, and family support available.

On its website, the US Department of Education recommends accepting “free money first (scholarships and grants), then earned money (work-study), then borrowed money (federal student loans).” 

If scholarships, grants, and work-study don’t cover your college costs, you’ll probably start looking at student loans to bridge the gap.

18 Factors To Consider: How To Choose The Best Student Loan To Pay For College Or Grad School

If you need student loans for college regardless of it being private or federal, here’s a quick guide on how to choose one.

1. Compile a list of student loan lenders that you’re interested in

Ideally, you’ll want to choose between reputable companies that have demonstrated an ability to support borrowers during repayment.

2. Know how much you need

Before looking at your student loan options, you want to know how much money you need to borrow. Look at what you have in grants, scholarships, and family support. Then look at the tuition costs, projected class and book costs, housing, and any other costs you’ll be expected to cover. How much will you need in total?

Subtract any funding you have from that total. The remainder is approximately what you will need to borrow in student loans.

3. Fill out the FAFSA

In order to get financial aid and student loan options, you must fill out the Free Application for Federal Student Aid (FAFSA®). The deadline for the FAFSA may vary by state, so be sure to check the deadline at StudentAid.gov. Your information will be sent to your school and you will receive a letter outlining if any loans are available to you, and for how much.

4. Research federal loan options

When you fill out the FAFSA, your award letter will outline which federal student loan options are available to you. It’s your choice whether to accept the loans and the amount. There are various types of federal loans you may qualify for, including:

  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Direct PLUS loans

Subsidized loans are a good option for borrowers, as the government pays for interest while the borrower is in school and through periods of deferment. Unfortunately, that’s not the case with unsubsidized loans. Direct PLUS loans are offered to graduate students or parents.

Federal loans should be the first option you consider, as they come with generous benefits and protections. For example, federal student loan borrowers who go on to work in the public sector are eligible for student loan forgiveness under the Public Service Loan Forgiveness program.

Additionally, federal loan borrowers can keep their payments affordable on Income-Driven Repayment or postpone their payments with deferment or forbearance. Federal student loans also have fixed interest rates and offer numerous repayment plans.

5. Research private loan options

If your federal student loans don’t cover all of your costs, you may consider private student loans as well. Private lenders will check your credit to see if you qualify and whether you’ll need a co-signer.

Private student loans are offered by financial institutions like SoFi (you can compare options online through sites like LendingTree and Credible) and don’t come with the same protections as federal student loans — no student loan forgiveness or income-driven repayment, and limited options if you’re unable to pay your loans. Private student loans typically offer fixed or variable rates and may not have as many repayment plan options available. While private loans can help cover any gaps in your college funding, it’s important to be aware of their limited protections.

6. Product

You’ll first need to make sure that the private lender offers student loans that fit your needs. For instance, does it offer financing for the type of degree you’re pursuing? Typical offerings include loans for students in undergraduate, graduate, business, medical, dental, and law school. Some lenders also design loans for students who attend a trade school or community college.

While you’re going over the lender’s products, check the loan limits and the length of the repayment term. You’ll want to make sure that you can borrow the amount you need and that the loan comes with flexible terms.

7. Review the eligibility requirements for each lender

Before applying for a private student loan, you should make sure that you’re likely to qualify. All private lenders have their own unique eligibility requirements. Make sure you’re eligible with a lender before applying to limit unnecessary hard credit checks.

Remember, we recommend adding a cosigner to your loan to improve your chances of approval, but that cosigner is on the hook to pay back your loan if you are unable to. If you and your cosigner don’t meet the eligibility requirements, you should remove that lender from consideration.

Every lender sets its own eligibility requirements, but they’ll usually look for:

  • Credit history: Your credit score and the information in your credit reports can determine your eligibility for a private student loan and the interest rate you receive. If you’re new to credit or you have poor credit, the lender may require a creditworthy co-signer. Borrowers typically ask a friend, parent or another trusted relative to fill this role. A co-signer agrees to make payments if you’re unable to, so you’re both equally responsible for the debt.
  • Income: You’ll also need to show that you have the income to repay the loan or get a co-signer who does. The lender may also calculate your debt-to-income ratio to check how much of your income goes toward debt payments each month.
  • Enrollment status: Lenders will check that you’re attending an accredited school, and some may require you to attend at least half time.
  • Citizenship: Private student loans are usually available only to U.S. citizens and permanent residents. International students may qualify for a private student loan if an eligible citizen or resident co-signs the loan.
  • Age: You must reach the age of legal adulthood — which is 18 in most states — before signing a contract for a student loan. If you’re not old enough, then you’ll need to find an eligible co-signer.

8. Review the loan terms

Make sure you understand what happens if you were to die or become disabled during the loan term. The lenders in our reviews all allow loan discharge for death or disability, but not all lenders have this feature. If you borrow from a lender that doesn’t allow for forgiveness due to death or disability, students should consider inexpensive life insurance to protect their cosigners.

Although private student lenders do not have the same income-driven repayment plans as federal student loans, they might have forbearance programs if you lose your job during the repayment period. It can be helpful to understand those programs up-front.

9. Get quotes from the lenders you’re eligible with

While most lenders display an interest rate range on their website, the only way to know the rate you’ll receive is by prequalifying or submitting a complete application. Make sure to utilize soft credit checks when possible to reduce the total number of hard credit inquiries on your credit report.

10. Choose a lender

The lender you borrow from should offer you the most affordable loan, with borrower protections that help you in times of need during repayment. Once you select a lender, you can submit your application and wait for the lender to inform you of your next steps.

11. Compare options and costs

When you have your financial award letter that outlines your federal student loan options, look at what is offered to you and compare it to what you need. Does it cover all of your costs? If you need private student loans, you’ll want to compare rates and protections among various private lenders.

Among your federal and private student loan options, look at:

  • The repayment term
  • The interest rate
  • Your prospective monthly payment
  • The repayment options available

Take a look at your interest rate and the total amount you borrowed. Use an online calculator to see how your interest rate will affect the total cost of the loan.

Additionally, review the repayment terms available. If you have federal student loans, you’ll be automatically enrolled in the Standard Repayment Plan with a 10-year repayment term. You can change plans to something that works better for you, like an Income-Driven Repayment plan which caps your monthly payments to a small portion of your income and has a longer repayment term.

The interest rate and repayment terms available for private loans may vary by lender, so check to see what options you have.

Reviewing all of these points can help you make an informed decision, so you can choose the right student loan for you.

12. Interest rates

The interest rate you pay — and whether it’s fixed or variable — impacts how quickly your balance grows and how much you pay overall. Lenders disclose their interest rate ranges, but the exact rate you’re offered depends on your credit score and other financial details.

Some lenders offer prequalification, which allows you to check your interest rate and loan terms without hurting your credit. It’s worth getting a prequalification offer if it’s available so you can calculate the cost of borrowing and compare offers.

Some lenders also offer a choice between fixed and variable rates. A fixed-rate may start a bit higher, but it remains constant throughout the loan term. This can help you plan for future payments. Variable rates can change over time, which may increase your loan costs.

Also look for interest capitalization, which occurs when the lender adds unpaid interest to the principal of your student loan. As a result, the loan balance grows faster.

13. Fees

Fees increase your total borrowing cost, so ask the lender for a copy of the fee schedule and check whether any apply to you. Some private student loan lenders keep fees to a minimum or may base your fees on your creditworthiness. Look for these types of fees:

  • Application fee: Some private lenders charge a nonrefundable fee to process your application.
  • Origination fee: Origination fees are usually calculated as a percentage of your loan amount and come from the loan proceeds, which means that you won’t actually get the full amount of the loan. For instance, with an origination fee of 5 percent on a $10,000 loan, you’d receive $9,500, with the remaining $500 going toward the fee.
  • Late fee: The lender may charge a late fee if you miss a monthly payment or submit it late. These are usually calculated as a percentage of the amount due, with a cap on the amount.

However, you won’t have to worry about prepayment penalties on any type of student loan. Lenders aren’t allowed to charge borrowers a fee when they pay off their student debt early.

14. Repayment terms

Many lenders allow borrowers to choose from a list of repayment plans. These usually include:

  • Immediate repayment: Start making payments as soon as the funds are disbursed. This can help you pay down the loan quickly and save on interest, as long as you can afford payments while in school.
  • Interest-only repayment: Pay interest while in school to keep your balance from growing too much. After graduation, you’ll make regular principal and interest payments each month.
  • Full deferment: Postpone payments while you’re in school and during your separation or grace period. This could be a good option if you can’t work while enrolled in school. Once deferment ends, you’ll start making installment payments.

Some lenders also offer forbearance programs, which allow you to pause monthly payments during times of financial hardship. But you’ll eventually have to make up for the missed payments, and interest will continue to accrue on the balance.

Before applying for the loan, estimate your monthly payments and look at different loan terms. A shorter loan term comes with higher monthly payments, but you’ll pay less interest overall. This could be a good option if you’re looking to save money and can afford the higher payments.

15. Additional features

If you’re having trouble choosing the best lender, look to the fine print for more details. Some features or benefits could lower the costs of borrowing or make repayment easier. Check for:

  • Autopay discount: You might qualify for a 0.25 percent to 0.5 percent discount off your annual percentage rate if you sign up for automatic payments. This usually takes effect once you start making full principal and interest payments.
  • Other savings opportunities: Some lenders provide other ways to earn money or save on the cost of borrowing. For example, they may provide discounts if you have another financial product with them, provide a cash reward if you refer a friend or reduce your principal amount once you graduate.
  • Hardship programs: Check whether the lender offers deferment and forbearance programs, which allow you to postpone or pause your loan payments. These programs can help if you’re financially struggling or you otherwise need a break from payments. Read the details to see when these programs apply.
  • Discharge options: In some cases, student loan debt passes on to the borrower’s estate after they die. But some lenders will discharge your student loan debt if you become permanently disabled or pass away.
  • Co-signer release. Your lender may remove your co-signer from the student loan debt after you make a series of on-time payments.

16. Apply for student loans

When you’ve decided which student loans you want, it’s time to officially apply. For federal loans, that process is taken care of with the FAFSA, but you’ll need to accept the loans on offer. If you’re applying for private student loans, have your income and tax information ready and be prepared to apply with a co-signer. Fill out all of the paperwork and apply online.

17. Sign a Master Promissory Note (MPN)

After you apply for your student loans, you’ll need to sign the Master Promissory Note (MPN). The MPN is a legal document that states you will pay back your federal student loans. Your private student loans will likely have something similar in their terms and conditions.

18. Know when your first payment is due

Once you’ve applied for student loans, you want to know when your first payment is due. Typically, you’re eligible for an in-school deferment so you won’t have to pay anything while in school. However, private loans may have different terms and require payment sooner. Check to see when your first payment is due and stay in touch with your loan servicer or lender to stay on top of your loans.

Haven took you through the strategic game plan for finding a good student loan – especially when it comes to private loans, it’s important you know the answers to these next few questions. 

  • What are student loans? 
  • Why are student loans important?
  • How do student loans work?
  • What are the different types of student loans?
  • What’s the difference between federal and private student loans?
  • What are some alternative student loans?
  • How much do student loans cost?
  • Are students loans worth the cost?
  • Are there loans for international students?

What are student loans?

Wikipedia defines a student loan as a type of loan designed to help students pay for post-secondary education and the associated fees, such as tuition, books and supplies, and living expenses.

At the most basic level, student loans are a form of financial aid.

You can use student loans to help pay for things like tuition, accommodation in a student dorm, health insurance, books, and whatever else is included in your school’s cost of attendance. 

But you wouldn’t be alone if you think of student loans as the type of financial aid you’re going to like the least… Why’s that?  

Well, because unlike other forms of financial aid, like scholarships and grants, you’re gonna have to pay these ones back. And, on top of that, you’ll also have to pay interest and fees as well as navigate a bunch of other terms.

Luckily, not all student loans are bad. 

Why are Student Loans important?

A Student Loan is a smart way of covering your college costs. There’s no shortage of expenses in college life. 

Student loans are similar to mortgages in that they are usually considered “good debt.” Both are large amounts of money that take a long time to pay back. By paying it back each month, you show the lender your ability to repay a loan and prove your creditworthiness, which can in turn increase your credit score.

In addition, you “get” something from good debt. In the case of a mortgage, you get a house and the value of that house generally increases over time. With student loans, you get a college education, which increases your lifetime earning potential. This is why these two types of debt are good debt, rather than bad debt.

How Do Student Loans Work?

Student loans are money borrowed from the government or a private lender to pay for college. The loan has to be paid back after graduation, along with the interest that has been accrued. The loan can usually be used to cover tuition, room and board, books, and other school-related expenses. Student loans are different from scholarships and grants which don’t have to be paid back.

You can apply for a student loan online and fill out your (and your parent’s, if applicable) financial information. Student loan qualifications are different depending on the type of loan you receive but can include FICO score and income. Typically, you will need multiple student loans to cover your entire tuition and all related expenses. A financial aid counselor from your high school or your future college should be able to help you better navigate the process. 

What Are the Different Types of Student Loans?

Typically, student loans fall into two major categories: federal and private. Private loans are also called alternative loans. 

Federal student loans: There are multiple types of federal loans but, in general, they have lower interest rates and better repayment terms than private loans. They’re also more readily available and may be easier to obtain than a private loan. They have fixed interest rates and some options aren’t dependent on your credit history. 

Private student loans: These should be looked into after federal student loans are exhausted. Private student loans may cover continuing education without a degree, tuition for non-U.S. citizens, and for education costs incurred after graduation.

In a recent interview with Carrie Johnson, an Accredited Financial Counselor (AFC®) and an associate professor at North Dakota State University, she said “Federal student loans have many repayment benefits. For example, there are forgiveness options for certain occupations or in the event of a disability. If a borrower is struggling to make payments, there are options to suspend payments for a period of time. Private student loans do not offer these benefits and in many cases, if a borrower passes away, their cosigner is then responsible for the remainder of the loan balance.”

What are the pros and cons of federal loans?

Pros:

  • The government funds federal student loans and parent loans
  • Terms and conditions are set by law
  • Income-driven loan repayment plan options
  • Opportunities for student loan forgiveness
  • No credit check
  • Fixed rates, low-interest rates and flexible repayment options
  • Free application process

Cons:

  • Only available to U.S. citizens
  • Subsidized loans are need-based
  • Subsidized interest only applies to undergraduate students
  • No statute of limitations on loan collections

What are the pros and cons of private student loans?

Pros:

  • Available to U.S. citizens and qualifying international students
  • No financial need requirements
  • Fixed and variable rates
  • Higher borrowing limits

Cons:

  • Each bank sets its own terms and conditions
  • Limited repayment options and hardship assistance programs
  • No student loan forgiveness opportunities
  • Requires credit check
  • Origination, application, and early payment fees may apply
  • No student loan forgiveness opportunities
  • Online pre-qualification availability varies by lender
  • The government and your school limits the loan amount

What Are Some Alternatives to Student Loans?

If you decide that a student loan isn’t for you or want to know what other options you have, there are some alternatives:

  • Parents pay for college
  • Merit-based scholarship
  • Athletic scholarship
  • Work-study aid 
  • Savings or an inheritance
  • Grants

How Much Do Student Loans Cost?

The main cost associated with student loans interests. However, some loans may also charge origination fees, prepayment penalties, and late fees. Federal loans tend to have lower interest rates so it’s best to apply for them first. Currently, the interest rate on federal student loans for undergraduates is 3.73%.2

Are Student Loans Worth the Cost?

Student loans can be expensive, with application fees and making monthly principal and interest payments. They can get especially expensive if you choose to go to grad, medical or law school in addition to a 4-year college. If you have an alternative way to pay for college, then it’s great to explore that first. Otherwise, student loans are generally worth the cost because you’re investing in yourself and your education, which should help you land a higher-paying job or acquire the knowledge and skills to start your own business. 

How We Chose the Best Student Loans

There are so many federal and private student loans to choose from. We reviewed dozens of student loans and chose the best student loans based on their interest rates, types of loans offered, cosigner requirements, loan consolidation options, and the overall application process. 

Are there loans for international students?

The International Student Loan Program is available to international students from around the world who are looking to study in the USA. To be eligible, you have to be attending one of the approved schools, earning credit and you must also have a US citizen or US permanent resident to cosign the loan with you. International Student Loan offers funding that is disbursed directly to you with competitive interest rates and no application fees! Names of International loans include MPOWER Financing; Prodigy Finance; Citizens One; Ascent Student Loans, and Discover.

How do I apply for a private student loan?

Once you’ve chosen a lender, you’ll fill out an application for a private student loan. Here’s a breakdown of the steps you might take:

  1. Time your applications. You can limit the impact to your credit scores by submitting your loan applications within a short time frame, usually 14 to 45 days. That’s because credit agencies usually count several applications for the same type of loan as one hard inquiry. It’s also a good idea to apply for the student loan at least two months before tuition is due.
  2. Find a co-signer. You might need a co-signer if you have a limited credit history, a low credit score or a low income. A good co-signer might be a trusted relative or friend who has the credit history to qualify and the income to handle payments if necessary.
  3. Gather your documentation. Before filling out the application, organize your documents to make the process easier. The lender may ask for recent pay stubs, a W-2, bank account statements, a copy of your latest lease agreement and more.
  4. Fill out the application. Every lender has a different application, but most ask for permission to check your credit, details about your finances and documentation to support any information. The lender will also want to know details about your income and employment status, how much you’d like to borrow, the school you’re attending and when you expect to graduate.
  5. Approval and disbursement. If you apply online, you may receive the lender’s decision within minutes. The process slows down if the lender needs supporting documents or it has questions. Once you’re approved, review the loan terms and loan documents carefully before signing. The lender will then contact your school to verify your details, confirm your cost of attendance and schedule the disbursement.

TheVibely have in our earlier post on student loans shared the best 7 private loans for students considering to pursue their education further, click here to read more.

How the best private student loans were chosen?

Here are the seven categories that we reviewed to score each lender:

  • Interest rates: The rate on your loan is the most significant indicator of how much your loan will cost over time. We valued lenders that offered low rates and discounts.
  • Repayment: Most borrowers will spend years repaying their student loans, and because of this, offering flexible repayment options was an important factor in our evaluation. Lenders that had borrower-friendly terms scored the highest.
  • Loan amount: When you take out a student loan, you want to make sure that the loan can cover all your expenses. Lenders that cover up to the total cost of education were scored highest.
  • Cosigner benefits: Most estimates have over 90% of new private student loans including a cosigner. Lenders that allowed cosigners to be released from the loan were valued above those that didn’t.
  • Fees: No private lender charging origination, application, or prepayment fees is eligible to be featured on this page. However, there are other fees that lenders may charge, such as late payment fees. The fewer fees charged by a lender, the better they scored.
  • Better Business Bureau (BBB) rating: The BBB rates businesses between an A+ and F on how likely it is to interact with its customers. For student loan borrowers who will likely have a question or two during the life of their loan, this is a valuable rating to reference. The higher the rating a lender received, the better they scored.
  • Benefits: To stand out amongst their competitors, most student loan lenders offer unique benefits and rewards. These benefits can include a free subscription, a graduation reward, unemployment assistance, and more. Lenders that provided benefits that helped borrowers better control the cost of their loan were scored highest.

Once we scored each lender, we then determined who was the best for different situations. If a lender wasn’t the best for anything, or they didn’t allow borrowers to choose between in-school or deferred payments, they were not included on that page.

Final Thoughts

Taking out student loans to help pay for school is definitely a big decision. But it doesn’t have to be a scary one that you regret later on! 

By planning ahead and understanding exactly how student loans work, you’ll be able to make a more informed decision and know how to find the best student loans for you. 

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