If you’ve exhausted your federal financial aid, and haven’t been lucky enough to win any scholarships to help cover your remaining expenses, chances are you are now researching private student loans to help pay for college. If so, there are several things you should consider before signing on the dotted line. First of all, you’ll most likely need a cosigner, especially if you are a younger student or haven’t been working at a stable job for several years. Approximately 90 percent of borrowers will need a cosigner, so don’t take it personally. Next, you’ll want to be sure that you borrow only what you absolutely need. Finally, consider the annual percentage rate being offered and any student loan borrower benefits that might be available. For those of you who may be unfamiliar with borrower benefits, these are perks you can earn based on a variety of factors. Let’s take a look at some of the current benefits being offered by private student loan lenders and how they can affect your bottom line.
Automatic Payment Reduction
Most private student loan lenders offer borrowers anywhere from a 0.25% to 0.50% interest rate reduction for enrolling in automatic payment plans. This can translate into several hundreds of dollars in savings over the life of the loan. For example, a $10,000 loan at a fixed rate of 8% paid over 10 years could result in a savings of approximately $237 (0.25%) to $463 (0.50%). Savings may be less if you have a variable interest rate, a lower fixed rate, or choose a shorter repayment term. If you cancel the automatic payments at any time or a payment is returned for insufficient funds, the discount may be lost permanently, depending on the lender’s terms.
Interest Rate Reduction
Existing Customers – If a private student loan lender offers an interest rate deduction for existing customers, it may be to your benefit to open a checking account with the institution, especially if it offers free banking services. As a loyal customer, you may be rewarded with either a 0.25% or 0.50% interest rate deduction over the life of your loan. As long as you maintain an account with the financial institution, you should continue to receive your discount.
On-Time Payments – Another way to earn a reduction in your interest rate is by making a certain number of on-time payments with your lender. For example, Union Federal offers a 0.25% interest rate reduction after you have made 36 on-time payments (payments made within 10 days of the due date) and have enrolled in an automatic payment plan prior to the 36th payment. On a $10,000 loan over 10 years (8% fixed rate) that amounts to a savings of around $108.
Other – If you use cuStudentLoans to finance your college education, you may be eligible to receive a 1% interest rate reduction once you enter full repayment (after the grace period) and have repaid 10% of your loan principal (subject to a 2.99% floor rate).
Some private student loan lenders will offer you a principal reduction after certain conditions are met. For example, SunTrust will give you a 1% reduction under the Graduation Reward program, as long as you submit a certified copy of your college diploma within 90 days of graduating. If you have made more than one late payment, you are no longer eligible for the reward. In general, a principal reduction is less valuable than an interest rate reduction because it is a one-time deal and not applied annually.
A few private student loan lenders offer cash rewards if you meet the qualifications for their programs. One of the most interesting right now is the Discover Student Loan 1% cash reward for good grades. If you earn a 3.0 GPA or higher during the academic term covered by your student loan, you can submit a redemption request within 6 months of the final term covered by the loan. The reward is calculated based on your disbursed principal balance and mailed directly to you. Keep in mind that you may owe tax on this type of reward since it may be considered income.
Another way to earn cash rewards is through the Sallie Mae Smart Reward® program, which gives you 2% of your scheduled monthly payments made on time while you are in school or during the grace period. To receive this borrower benefit, you must have an active UPromise® account and select either the interest or fixed repayment option. Again, this type of reward may be subject to income tax, so the overall benefit may actually be much lower once that is taken into consideration.
In addition to these borrower benefits, some lenders also offer limited perks. Right now, SunTrust is offering a .75% interest rate reduction to students who submit a student loan application between June 1 and July 31, 2014. Once approved, the reduction will be applied on the initial disbursement date and be effective during the life of the loan. Likewise, Citizens Bank is offering a 0.25% interest rate discount for applications for its TruFit Student Loan® received by June 30th, 2014.
In most cases, you can earn more than one borrower benefit, so the savings can really add up. Just remember to review your lender’s terms carefully and understand your obligations for maintaining these benefits. Finally, when reviewing the repayment examples lenders provide, be sure to read the fine print to see if those examples include borrower benefits. We haven’t seen any that do, but when you are trying to compare you options, inclusion of benefits can make a noticeable difference in terms like APR.
Still confused? Compare student loans using our free LoanFinder. We level the playing field by comparing loan programs on equal terms so you can make an informed decision before you borrow.