How to Choose a Student Loan: Doing an Apples-to-Apples Comparison

College Student in the Library

Choosing the student loan provider that suits your needs may require you to do a little homework. For starters, you’ll want to understand factors like repayment plans, origination fees, and interest rates, which vary from loan to loan and can impact how much you’ll end up paying for what you borrow. Our LoanFinder is a great tool for comparing student loans side by side. But first, let’s learn a little more about how to evaluate and choose a student loan.

Understanding Student Loan Types

Before turning to private student loans from a bank or another institution, it’s generally a good idea to maximize whatever federal student loans you may qualify for. That’s because some federal student loans have benefits such as government-subsidized interest during certain periods of your loan, or the possibility of income-driven repayment plans designed to suit your salary. 

Generally, federal student loans cost less to repay than private ones. One reason for this is that federal interest rates are usually lower than private student loan interest rates. However, federal student loans may not cover the full cost of your education. In that case, you may need to take out private loans made by a lender such as a bank, credit union, state agency, or even a school.

Student Loan Interest Rates

As you probably know, interest is calculated as a percentage of your loan’s principal, or the amount you borrowed. The lower the interest rate, the less your loan will cost you to repay. However, choosing the most affordable college financing is not always as simple as searching for the lowest interest rate student loans. That’s because there are two types of interest you may encounter: fixed or variable.

Fixed interest stays the same for the life of the loan. Since the interest rate of your loan does not change over time, your payments are generally the same from month to month. It’s also easier to estimate what the overall cost of your loan will be.

Variable interest may change according to market rates. That makes this type of interest more risky, because it could start out low but grow over time, increasing the size of your payment. While you have the potential to save money with a variable rate, you could also end up paying more than you bargained for.

You may notice that some lenders show two ranges of potential rates, one for fixed interest and one for variable interest. Often, variable interest starts out at a lower rate than fixed interest, but remember: this rate has the potential to fluctuate over the life of your loan. Choosing a fixed or variable student loan interest rate requires you to weigh the potential risks and benefits of both. 

Student Loan Origination Fees

Another factor to consider when choosing a student loan is the origination fee, which is generally calculated as a percentage of the amount borrowed. Most federal loans have these fees. However, it is possible to find private loans with no origination fees. 

An origination fee should not necessarily be a deal-breaker, however. A Federal Direct Loan with a fixed 4.45% interest rate and a 1.066% origination fee will still cost you significantly less over time than a private loan with an 8% interest rate and no origination fee. 

Loan Length and Repayment Plans

When researching loans that may be the perfect fit for your needs, consider how long you’d like to spend paying off your loans after graduation, and how large of a monthly payment you’ll be able to afford. Having the choice of flexible repayment plans may help you fit your loan payments into your budget. Federal student loans may offer a variety of repayment plans, like:

Graduated Repayment Plan: In this plan, your payment starts out lower, then increases as time progresses. This may help keep your payments low when you first get out of college, while still ensuring you pay your loan off in about ten years.

Extended Repayment Plan: For students who have borrowed over $30,000 in Direct Loans, this plan ensures loans are paid off in 25 years, instead of the standard ten years.

Revised Pay As You Earn (REPAYE) Repayment Plan: Your payments will be adjusted based on your income and family size, meaning they may fluctuate throughout the course of repayment. Any unpaid balance will be forgiven after 20 years (for undergraduate loans) or 25 years (graduate or professional loans). 

But while federal loans tend to offer the most flexible repayment plans, some private lenders may offer you a few options, too. For example, the lender Sallie Mae offers the opportunity to make either interest payments or small, fixed payments while you’re still in school, potentially helping you save money over the life of your loan. As you compare private loans, take the time to learn more about how various repayment options could affect the total cost of your loan. 

Options for If You Can’t Make Payments

Hopefully, there never comes a time when you can’t afford your monthly payment. However, if payment difficulties arise, having options can help you keep your student loans in good standing. Two potential options you may want to look for are:

Deferment: This option may let you temporarily reduce or postpone your payments. Deferment may help you if you decide to return to college or attend graduate school before your loans are paid off, for example. Some federal loans will not accrue interest while they are in deferment.

Forbearance: Forbearance is similar to deferment, in that you may be able to postpone your payments until you are able to resume making them. However, students are always responsible for paying interest on loans that are in forbearance. 

Keep in mind that not all private lenders offer these options, and they may have various criteria or stipulations for going into deferment or forbearance. For instance, lenders may charge fees for entering forbearance, and there may be varying time limits for how long you can put off making your payments.  It’s a good idea to evaluate potential lenders based on their policies for helping you avoid loan delinquency or default, since either of these worst-case scenarios could result in penalties, damage to your credit score, and other unpleasant consequences. 

Student Loan Discharge Options

Discharge means you are no longer required to make payments on your loans due to specific circumstances, such as a total and permanent disability, death, or if your school closes. Federal student loans may be discharged in the above circumstances, as well as in other potential scenarios. Private loans, on the other hand, can vary when it comes to discharge policies. 

Consolidating or Refinancing Your Student Loan 

Finally, you may wish to evaluate lenders based on how easy it is to consolidate or refinance your student loan. For instance, a Federal Direct Consolidation Loan may allow you to combine multiple federal loans into one payment, helping you simplify your finances. 

Private lenders may also offer consolidation loans, as well as potential refinancing options that may help you lower your interest rate, reduce your monthly payment, and/or change the length of your repayment term. You’ll have to check with your prospective lender to find out what options they offer, if any.

Compare Loans That May Fit Your Needs

Now that you have a better understanding of how to compare and choose student loans, it’s time to explore potential paths to funding your college education.

Apply for Student Loans with Our Private Loan Partners:

Applying for a private loan can often be done online with your result happening in a matter of minutes. To apply with one of our loan partners online, click the links below!

  • Looking for last-minute money for college? Check out the Smart Option Student Loan by Sallie Mae, which offers 3 repayment options and competitive interest rates to fit your financial needs Learn more and apply today!
     
  • The Ascent Tuition Student Loan features affordable variable rates, flexible repayment options and no application fees. Co-signers such as a parent or guardian are strongly recommended to increase your chance of approval. Click here to apply now.
     
  • The College Ave Student Loan can help you get the money you need for college or graduate school with a fast application and instant credit decision. Click here to apply now.