Navigating the Student Loan Maze

Jul 17 2012

"Financial Aid",College costs aren’t limited to just tuition. You need to consider room and board, books, meals, transportation and more. After you’ve applied for scholarships, grants and federal loans, it’s not uncommon to need additional funding for a complete college education.

This is where a private student loan can help. If you’re exploring what private loan is right for you, here are some important questions to ask so you can make the right decision for today and your financial future.

What is the interest rate?  You must decide if you want a fixed-rate loan or a variable-rate loan. A fixed-rate loan will typically have a higher interest rate, but the rate will not fluctuate over the life of the loan, so you’re protected from large interest rate swings.

Is co-signing beneficial?  Because eligibility, interest rates and reserve fees for private loans are based on your credit, a co-signer may help you get the loan you need at the rates you want. This is particularly true for younger students who may not have an established credit history. A co-signer may be a parent, guardian or close relative who has an established credit history and stable income. It’s important for any co-signer to understand that if the student borrower cannot pay the loan for any reason, the co-signer is then responsible for any remaining loan obligations.

What can you afford to borrow?  It can be difficult to predict the future, but one way to help determine what amount you should borrow is to estimate your future earnings. It’s wise to be conservative in your estimates. A good general rule to follow is your monthly student loan payment should not be more than 8 percent of your monthly salary. Remember that if you borrow too much and have late or missed payments, this will be reflected on your credit history (and any co-signer’s credit history).

What are the repayment terms?  Every loan has different terms and it’s important to understand all the details before you sign the paperwork. Some things to consider include how long you have to pay back the entire loan, is there a grace period between graduation and when payments start, and is there a discount for any auto-payment plans? If you don’t completely understand the terms, make sure to ask lots of questions.

Any time you take out a college loan, only take out as much money as you need for education-related expenses. Start by learning your options and once you find the right loan for you, you’ll be able to get the degree you want and set yourself up for financial success in the future.