June 19, 2018 By Mark Kantrowitz
Six Steps for Saving on Student Loans
Six smart borrowing strategies can help you save money when you borrow student loans to pay for college.
1. Borrow federal first.
Federal student loans offer low fixed interest rates to all borrowers, not just borrowers with excellent credit scores. Federal student loans typically offer longer deferments and forbearance periods, income-driven repayment, and loan forgiveness options. Private student loans should be considered only after you’ve reached the loan limits on the federal student loans.
2. Shop around for the best price on private student loans.
Interest rates may vary based on your credit scores and the credit scores of your cosigner (if any), your choice of fixed vs. variable rates, the length of the repayment term and lender policies. The only way to learn which lender will offer you the lowest interest rate is to apply for multiple loans. Credit bureaus can now recognize shopping around behavior, so the penalty for applying for multiple loans is minimal. Lender discounts can provide interest rate reductions or other cost savings if you agree to make loan payments through automatic monthly transfers from your bank account to the lender.
3. Factor in the fees.
Loan fees are a form of prepaid interest that can increase the cost of the loan. Each 4% in fees is roughly the equivalent of a percentage point higher interest rate on a no-fee loan, assuming a 10-year repayment term.
4. Apply with a creditworthy cosigner.
Even if you can qualify for a private student loan on your own, applying with a creditworthy cosigner can yield a lower cost loan. But, a cosigner is equally obligated to repay a cosigned loan, so consider whether the lender offers cosigner release and how easy or difficult it is to qualify for cosigner release.
5. Compare loans carefully.
Consider the total payments over the life of the loan, not just the monthly payment. A loan with a longer repayment term may have a lower monthly payment, but also higher total payments. Also, lenders may offer lower fixed interest rates on a shorter repayment term in a rising rate environment. Variable interest rates tend to be initially lower than fixed interest rates, but may increase a lot later.
6. Can you customize repayment terms?
Some lenders, such as College Ave Student Loans, offer flexible repayment terms, some do not. Some offer a choice of in-school and grace period payment options, some do not. Choosing a shorter repayment term and making payments before the loan enters repayment will save you money.
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