Secrets to Getting the Best Student Loan Rates

Your parents will tell you, “a penny saved, is a penny earned.” In today’s economy, saving as many pennies as possible is more important than ever. Savvy consumers price shop for everything – even milk. The same should be true for private student loans. There are a number of banks and other lenders that make credit-based education loans available to students, but how do you actually get the best student loan rates?

Getting the Best Student Loan Rates

Well, of course we’ll tell you the best place to start is by comparing student loans using our LoanFinder. However, we’re leaving the choice of lender up to you, the borrower. We think we can do better so without further ado, here are seven things you can do to ensure you get the best student loan rates.

1. Compare Student Loans

Like we already said, our student loan comparison tool is the first step you should take along the path to choosing a lender and loan program.  It may not seem like much of a secret, but in actuality it turns out that it’s really hard to compare individual student loan programs without using a tool like ours. The reason is that the questions we ask help us find programs that match your basic needs and determine your initial eligibility to apply to a particular program.

Once we match you to programs, we help you understand the cost of the program for the academic year in which you will borrow.  

Besides taking in all of the banks’ and lenders’ program information, and minimum and maximum interest rates, we make assumptions that apply to all of the loan programs we compare. It’s important to apply certain assumptions the same way to every loan program compared because, by doing so, we are truly showing you apples-to-apples comparisons. When you use our tool, you will be comparing programs by monthly payment, total cost and APR. You will also be able to review detailed side-by-side comparisons for up to four programs at a time to find best student loan rates.

2. Apply with a Creditworthy Student Loan Cosigner

According to the Consumer Financial Protection Bureau’s “Mid-year update on student loan complaints (2015)”, 90% of undergraduates and 75% of graduate students apply for private student loans using a creditworthy cosigner. The most important factor in determining whether you will be approved for a private student loan is to determine your ability to repay the loan you wish to borrow. Most students don’t have a long enough credit history or high enough income to qualify on their own.  

That’s where a cosigner can make a big difference.  A cosigner is a person who agrees to repay the loan if the student borrower does not.  As such, lenders look at the cosigner’s credit score, income, and other factors in determining whether or not to approve a loan.  Plus, applying with a cosigner often means you may receive a much better rate even if you could be approved on your own.

3. Shop for the Best Student Loan Rates

When you use our Loan Finder to compare student loans, apply to each of the programs for which you’re eligible – not just one. It may be tempting to choose a lender you already have a banking relationship with or a lender that advertises the lowest interest rate or APR. Since we can’t determine if you’ll be approved, let alone what terms you may be offered, we can only tell you if you may be eligible to apply for a given program and show you the range of rates offered by the banks and lenders.

The final decision to approve a loan, and most important at what rate, is determined by the lender. So, you can’t simply pick the lender with the lowest advertised rate. Here’s a quick example using a student looking to borrow $10,000 for her first year as an undergrad:

At first glance, it would appear that Lender A has the best student loan rates. If Lender A also happens to be where she banks, then that would sure make choosing easy, right? Not exactly. Notice that the APR’s range from as low as 2.16% for Lender A to as high as 10.40% for Lender C. The real question is, “what rate will she be approved for?”

That turns out to be our biggest secret. There is no way to know who will give her the best student loan rates without applying to all three. Lender A may approve her at 4.38%, Lender B may be 4.25% and Lender C may actually come in at 4.05%. While Lender C was not the obvious choice initially, it turns out they may actually offer the best student loan rates.

4. It’s OK to Apply to More than One Student Loan Program

As we point out in “Does Applying for Multiple Student Loans Hurt My Credit?“, your credit, as well as your cosigner’s credit score, will not be affected more than it would be by having one credit report inquiry, provided you apply within a relatively short period of time (within 30 days to be safe). This is because it is obvious that you are rate shopping rather than attempting to open multiple lines of credit. The same is true when you shop for the best rate for a car or mortgage.

5. The Repayment Plan You Choose Could Affect Your Rate

Most private student loans will offer you three options when it comes to how you repay your student loans. You may either pay principal and interest immediately, pay interest only while you are in school, or defer payment of both principal and interest until after you graduate.

First, the longer you take to repay, the higher your total cost of borrowing will be. Second, most lenders offer lower rates if you do not defer repayment. Finally, some lenders may offer a slightly better rate if you make a small payment in school.

Even if you can’t afford full payment while in school, see if making interest only payments is feasible. Each type of repayment plan may have a different interest rate. Be sure to note the differences when comparing your options and before applying. If the lender isn’t clear in their initial disclosures, call and talk to them directly to be sure you know whether how you decide to repay your student loan may affect your rate.

6. Take Advantage of Repayment Incentives

Every lender in our database offers at least a 0.25% interest rate reduction if you have your payments made automatically from your bank account. Be sure to enroll in automatic payments to ensure you get the extra savings this incentive provides. Some lenders offer a rate reduction for being a current customer before applying.

If you or your cosigner aren’t a customer and a customer discount is available, see what kind of account may qualify. It may be as simple as opening a free checking account and then applying for the loan. Beyond those “automatic” discounts, be sure to look for other repayment incentives and weigh them as factors in your final decision. If you want to do a simple comparison of the difference made with and without the reductions, we have a student loan payment calculator to help.

7. Variable Rate Student Loans Are Riskier but Cheaper

Many lenders offer both variable and fixed rate student loans. Variable rate loans’ interest rates may change over the life of the loan (from when it is first disbursed to when it is fully repaid), whereas fixed rate loans’ interest rates do not change. In our post “Variable vs Fixed Rate Student Loans“, we weigh the pros and cons of each type.

The bottom line is that the advertised rates for variable rate programs are always lower than fixed rate programs. The key factor is that when you choose a variable rate, you are essentially betting that your interest rate will not increase substantially over the course of repayment. Be sure to read our post and decide if you are comfortable with taking a risk with a variable rate loan or would rather choose a fixed rate (and pay more) but know that your rate won’t change.

All of our other tips still apply to fixed rate programs, so be sure to follow them even if you choose a fixed rate loan.

All of this may sound really complicated and time consuming. We won’t lie, it is. However, it’s worth the effort when so much money is at stake. Remember, borrow only what you really need and be sure to utilize your full eligibility for federal student loans, and apply for as many scholarships as possible, before pursuing private student loans.

Armed with this advice, you’re sure to find a private student loan that’s right for you. Take your time, review your options carefully, and go shopping!