Did you know that private student loans have varying rates of interest? This means you can shop around for loans and find some pretty good deals. You cannot do this with federal student loans. Those rates are set for the year and are fixed for that particular year. They are also the lowest rates you will find on student loans, however, so it makes sense to first exhaust all your federal financial aid options and only consider taking a private student loan if you need more than that.
Shop Around & Compare Student Loans
Looking for the lowest rate on student loans is the same as looking for the lowest rate on anything else—you have to shop around. Yes, it can be tedious and time-consuming, but it is worth it for the money you save. You may be tempted to skip the search altogether and just take a loan from a private lender who you have been dealing with over the years and are familiar with. This could be a big mistake. If their interest rate is even a fraction higher than another lender’s rate, you could end up paying thousands more just on the accrued interest.
You must shop around and negotiate in order to score the lowest student loan rate.
Comparing student loan rates may not be as simple as it sounds. You cannot simply compare different published rates of interest and choose one that has the lowest rate. Finding the best loan is a little more complex than that. You need to take into consideration the APR, the loan term, the monthly payments you will have to make, and the total cost of the loan. You also have to find out what is the rate you will be approved for. Lenders take a look at different factors including your credit history in order to establish your lending rate. A good credit score or getting a cosigner with a good credit history will qualify you for a lower rate of interest.
There are several online loan comparison tools that can help you compare different student loan rates and determine which one works out best for you.
Choose Your Repayment Plan Carefully
When it comes to repaying your loan, a shorter loan term and a longer loan term both have their pros and cons.
When you choose a longer repayment term, you have to pay back a smaller amount every month. While this can be less stressful as you do not have to struggle to stretch your paycheck every month and you do not have to sacrifice every luxury to meet your loan payment obligations, by the end of the loan term you will end up paying much more by way of accrued interest.
On the other hand, when you choose a shorter repayment plan, you will have to make a lot of compromises in order to make the larger monthly payments. But this also means you will finish paying off your loans much sooner and better still, it reduces your total loan amount substantially.
Opt To Start Paying Back Your Loan While You Are Still In College
In most cases, you will get three repayment options with private student loans and each of these options comes with a different rate of interest.
The first option involves paying back the principal and interest while you are still in college. Most private lenders will offer you the lowest interest rate if you choose this option.
The second option involves paying back only the interest while you are still in college. This option comes with a slightly higher rate than the first option but it will still be much lower than the third option.
The third option, which is also the one that most college students choose, involves deferring the payments till after graduation. This comes with the highest loan rate and increases your total cost of borrowing considerably.
Before you make any decisions one way or another, it is critical to compare all of your options and get clarifications from the lender on issues that you are not entirely clear about. Find out the rates of interest against each of the options and do your own calculations to determine how much difference it will make to your overall debt. This will help you make a more informed decision.
Have Additional Funds? Pay Back Your Private Student Loans First
Private student loans are usually more expensive than federal student loans. While you will need to make the mandatory monthly payments on your federal student loan, if you have any additional funds, you should always put that towards paying off your private student loans first.
Another thing to remember about making an early payment, you must make sure to instruct the lender to put the additional funds towards your principal amount, not the interest. By default, most lenders put all additional funds towards the next interest. However, this does not help you much as the principal amount still keeps on accruing interest. When you put the funds towards paying off the principle, it reduces the amount that you have to pay interest on, lowering your total loan amount substantially.
Use Repayment Rewards To Your Advantage
Different lenders offer different repayment incentives to encourage borrowers to make their payments on time. Be sure to read the fine print on your lender documentation to see what incentives each lender is offering and use it to get those extra savings.
One of the most common repayment incentives that almost all lenders offer is a reduction in the interest rate for automatic payments. This means giving your bank instructions to make the loan payments on a certain date every month. With automatic payments, the lender is assured that they will receive their payments on time every month. In return, they show their appreciation for the timely payments by reducing your interest rate. It may be a marginal reduction but it can add up over the life of the loan. For this to work, you must make sure that you have sufficient balance in your bank account to cover your loan payments every month.
Finding the lowest student rates is worth the time and trouble when you consider the amount of money you will save in the end. Before you accept any loan, speak to the lenders personally, and negotiate for the lowest rate possible. Remember, even a seemingly negligible discount can translate into huge savings for you by the time you finish paying off your loan.
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