Rebecca Safier
Updated on November 20, 2020
November 20, 2020November 20, 2020Student Loan RepaymentBig Money Decisions, Featured, Parent Loans, Paying for College, Student Loans1394SEO
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With college tuition costs rising year after year, you might be considering borrowing a student loan to help your child pay for college. But before you apply, it’s important to do a college loan comparison to find a loan with your best terms and lowest costs of borrowing.
College loan comparison: 7 important steps
Let’s get a closer look at how to compare student loans so you can find the right one for your child’s education. Here are seven steps to take:
1. Start by comparing interest rates
2. Ask about interest rate discounts
3. Watch out for hidden fees
4. Explore repayment terms
5. Find flexible plans to pay back your loan
6. Research credit requirements
7. Find out what the customer service is like
1. Start by comparing interest rates
Perhaps the most important factor when choosing a student loan company is finding the lowest interest rate. The federal government sets rates each year on its student loans — for the 2020-21 year, the fixed rate on a parent PLUS loan is 5.3%.
Private lenders, on the other hand, each set their own rates. Interest rates can be either fixed, meaning they stay the same, or variable, meaning they fluctuate over the life of the loan.
Each lender offers a range of rates. Borrowers with strong credit will qualify for low rates, while those who are seen as riskier might get higher rates. SoFi, for example, offers variable rates at 2.26% – 5.94% and fixed rates of 2.99% – 5.94% on its student loans for parents.
Your interest rate determines how much you spend over the life of your loan on top of the initial amount you borrowed. The lower your interest rate, the less you’ll spend over the years. Even a small difference in interest rates can save you a good deal of money.
For example, let’s say you took out $20,000 at a 7.00% fixed interest rate. On a 10-year repayment plan, you’d pay $7,866 in interest. But if you got a 5.00% interest rate instead, you’d only pay $5,456. Lowering your rate by just 2.00% could save you $2,410 over 10 years.
You can crunch the numbers on your own loan offers using this calculator (It’s really designed for considering refinancing offers, but it can also determine the difference between rate offers.)
Student Loan Refinancing Calculator
Fortunately, some student loan companies make it easy to compare interest rates. All you need to do is submit a quick preapplication form. After providing your name and a few other basic pieces of information, a lender can give you an instant rate quote.
Note that these rates aren’t locked in until you accept an offer and submit a full application, though rate quotes can give you a way to easily compare lenders. Plus, these rate checks won’t affect your credit.
When doing your college loan comparison, make sure to check out several offers — that way, you can get a low interest rate and make the costs of borrowing as low as possible.
2. Ask about interest rate discounts
Some of the best student loan companies also offer ways to lower your interest rate with special discounts. Many lenders offer a 0.25 percentage point discount if you sign up for autopay — instead of manually submitting a payment each month, you could let the lender make automatic withdrawals from your bank account.
Citizens Bank and SoFi, for example, discount your rate by a quarter percentage point after you set up autopay. Plus, Citizens Bank offers an additional 0.25-point reduction if you’re already a banking customer. By setting up autopay and opening a checking account with Citizens Bank, you could lower your interest rate from, say, 5.00% to 4.50%.
As mentioned in the previous section, small discounts do make a significant difference over time. A $30,000 loan at 5.00% would accrue $8,184 in interest over 10 years, but that same loan at 4.50% would accrue $7,310 — that amounts to a savings of $874.
When thinking about how to compare student loans, be on the lookout for special rate cuts, whether for autopay, holding a banking account or any other reason. If you can’t find this info online, call the lender’s customer service line to find out more.
3. Watch out for hidden fees
Just as private lenders set their own interest rates, they also differ when it comes to fee structures. Some charge an origination fee when they disburse a loan; others may impose a fee for applying.
Fortunately, some student loan companies charge neither. They might charge extra for mistakes like a bounced check, but they won’t penalize you for applying. Some lenders also don’t charge a fee when disbursing your loan.
As for federal loans, along with its 5.3% interest rate and federal protections, the federal parent PLUS loan also comes with a fee — an origination fee of 4.228% for loans disbursed between Oct. 1, 2020 and Sept. 30, 2021.
4. Explore repayment terms
Most student loan companies offer a range of repayment terms. College Ave, for example, lets you choose terms between five and 15 years on its parent student loans. Citizens Bank lets you choose between a five- and a 10-year term.
Let’s say you took out $20,000 with a 5.00% interest rate. On a five-year repayment plan, you’d pay $377 every month. Over 10 years, you’d have a monthly payment of $212. If you chose a 15-year term, your monthly payment would drop to $158.
Going with a long-term repayment plan could mean lower payments. However, you’ll be in debt for longer, meaning you could spend more on interest in the long run. Ultimately, you’ll have to balance saving money on interest with a monthly payment you can afford.
Consider what works for your budget before choosing a term. Once you sign up, your repayment term is locked in.
5. Find flexible plans to pay back your loan
Federal parent PLUS loans typically beat private ones when it comes to repayment options. If your payments are too high on the standard plan, for instance, you can apply for the graduated repayment plan or extended repayment plan. If you consolidate, you can also get on the income-contingent repayment plan.
Private loans don’t usually have as many repayment options, but some lenders are flexible. Citizens Bank, for example, lets you make interest-only payments while your child is in school. College Ave allows you to set your own payment — plus interest — until your child graduates.
This kind of flexibility can be a lifesaver if you’re struggling to meet payments at first. Before you choose a student loan company, make sure to ask about your options in case of financial difficulty.
6. Research credit requirements
Besides shopping around for your best deal, you’ll also want to find a student loan company that’ll approve you for a loan in the first place. To qualify for a private student loan, you have to meet the lender’s credit and income requirements.
Unfortunately, lenders typically don’t advertise the minimum credit score they require. But you can apply for a rate quote with multiple lenders to get a sense of whether you qualify.
Checking out credit requirements is also useful if you and your child want to apply for cosigner release in the future. Some lenders will eventually let you off the hook for your child’s loan if your child can meet the credit criteria on their own.
7. Find out what the customer service is like
Although saving money is probably your top priority, good customer service is also worth considering. Before making your final choice, search for some customer reviews to find out what other borrowers have to say about the student loan company. You might also want to check with the Consumer Financial Protection Bureau’s Consumer Complaint Database.
Transparent, helpful customer service representatives can make a big difference. Make sure to search for any red flags before you select your student loan company.
Shop around for your best student loan companies
Although you want to avoid major student loan debt, a reasonable lender can help you support your child through college.
By researching student loan companies and doing a college loan comparison, you can find the student loan that best meets your family’s needs.
Consider the pros and cons of both federal parent loans and private parent loans to find the right one for you.
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