Tips include maxing out federal student loans, understanding the interest rate, considering repayment timelines, thinking about character, and more.
When borrowing money for college, it’s a good idea to know as much as you can before you take a private student loan. Review our general guidance on private student loans. And then below, we’ve listed some key tips to keep in mind if using private student loans as one of your financing options.
Make Sure You Have Maxed Out Federal Loans
Before you borrow a private student loan, work with your college’s financial aid office to make sure you have received the maximum available in Federal Direct Student Loans. Federal Direct Student Loans (which come in two types: subsidized and unsubsidized) are your best option because they offer a guaranteed fixed interest rate, can be consolidated, and feature multiple repayment options. You will need to file the FAFSA to be eligible for these loans.
Know Your Credit Score
This is an important factor when applying for credit-based loans. By finding out your credit score ahead of time, and understanding your credit, you can take measures to improve it (if necessary) before applying for a loan.
Understand the Interest Rate
Oftentimes, the lowest advertised interest rate will be offered only to those individuals with near perfect credit. Borrowers with good or fair credit may be offered an interest rate that is much higher, so be sure to look at the entire range of interest rates associated with each loan. As a borrower, you should always know and understand what your actual interest rate is, whether it is fixed or variable, and if there is an interest rate cap, before you borrow.
Collect as Much Information as Possible
While the interest rate of a loan is important, deciding on a college loan requires gathering and evaluating all details of the entire loan, not simply a single element such as the rate you see advertised. Collect all the key information on each loan option, including the repayment term, options for modified payment in times of hardship, application process, and fees. Compare them, and then decide which one is the right fit.
Consider Repayment Timelines
Consider if you can defer the loan while the student is in school, if you can make just the interest payments while the student is enrolled, if the repayment will begin immediately or after graduation, and how many years you have to repay the loan. Also find out if there are any prepayment penalties.
Think about Character
Do your research to find out about each lender you’re interested in. Do they offer other resources to help you, the borrower, such as calculators, videos, and support articles? Can you call them to ask questions and receive guidance on making financing decisions? You’ll want to work with a lender you trust.
Don’t Borrow More than You Need
To find out how much to borrow, review your college bill or estimate your balance due with MEFA’s College Cost Calculator. Pay what you can from savings and then ask your college if they offer an interest-free monthly payment plan to split the balance into smaller installments. Use loans only as a last resort. But do borrow what you need for the full year, rather than one semester. The college will split the loan into two and apply each portion to the fall and spring semesters.
Know Your Monthly Payment
Before you borrow, estimate your monthly loan payment to make sure the amount will fit within your budget. And remember, if you’re borrowing for the first year of college, you’ll likely have to borrow for subsequent years, so multiply that loan payment by the number of years you plan to borrow. If you’re a student, consider using MEFA Pathway’s Loan Cost Estimator to find out if your monthly payment will be feasible based on your projected future salary. And if you’re considering MEFA Loans, use our Student Loan Payment Calculator to estimate your projected monthly payment and total loan cost.
