As college graduates head out into the world, they will soon be faced with repaying their student loans. As high school graduates head off to college, they may be thinking about taking out student loans to help cover some of their costs. Before making any decisions, it is important to compare federal student loans and private student loans. While federal student loans have fixed interest rates, private student loans may have fixed or variable interest rates:
• Fixed Interest Rates: These remain the same throughout the life of your student loan. This usually allows you to determine exactly how much you will be paying each month. An exception, however, is that the payment might change if you qualify for deferment, forbearance, or an interest rate reduction benefit.
• Variable Interest Rates: These interest rates are usually tied to some type of index, such as the Prime Index or the London Interbank Offered Rate (LIBOR) Index, and go up or down as the chosen index changes. This means your monthly payment can change based on interest rate fluctuations, and also if you qualify for deferment, forbearance, or an interest rate reduction.
When you compare federal and private student loans, look at the Annual Percentage Rate (APR) to make a fair comparison because it includes interest, fees, and other charges, and also takes into consideration whether payments have been deferred. The APR may actually be higher or lower than the stated interest rate.
Understand when interest starts accruing, or adding up, on your student loans. In most cases, interest is deferred while you’re in school and doesn’t start building until graduation, but some loans may start accruing interest while you are still in school, even though you are not yet making payments. Recent graduates will likely be entitled to a grace period of six months before they need to make any payments; however, interest may still accrue during this time. If your budget allows, it might make sense to start repaying your student loans as soon as possible.
If you have a number of student loans, you could consider consolidation. This helps you combine several existing federal loans into one or several private student loans into one. You won’t have to juggle a number of loans and you might be able to save money on interest rates.
What About Student Loans for 2014-2015?
The federal government usually sets the interest rate on federal student loans on July 1. The National Association of Student Financial Aid Administrators (NASFAA) predicts the following interest rates on student loans for the upcoming academic year:
• 4.66 percent – Federal Direct Stafford Loan (Subsidized and Unsubsidized) for undergraduate students
• 6.21 percent – Federal Direct Unsubsidized Stafford Loan for graduate or professional students
• 7.21 percent – Federal Direct PLUS Loan for parents and graduate or professional students.
If you need help understanding your federal and private college student loans, or would like more information on the college financial aid process, contact College Financial Aid Advisors (CFAA).