Tips for Saving on Student Loans
Just when millions of students and parents are rushing to line up their college loans, continuing allegations of shenanigans are roiling the lending industry, driving lenders out of business, scaring colleges away from giving advice, and raising the prospect of new federal regulations.
The changes are complicating an already confusing process of finding the best educational loan, counselors say. But they say that today's shoppers can still find good deals and that some of the changes may result in easier and cheaper loans in coming years.
Allegations that schools were accepting kickbacks to steer students toward unnecessarily expensive loans have resulted in many parents and students mistrusting the "preferred lender" lists colleges provide. But that is "leaving many families vulnerable to the mass marketing" that lending companies are now blitzing families with, says Linda Taylor, a private aid counselor in Camarillo, Calif.
Many of those brochures, E-mails, and websites contain confusing or even misleading information. Taylor has had to rescue clients who didn't realize, for example, that federal Stafford and PLUS loans are actually much better deals than the low-interest teaser rates advertised for private loans.
Here are a few steps borrowers can take to shave thousands of dollars off their educational debts:
Stick with the federal educational loan programs—Perkins and Stafford for students, and PLUS for parents—says Stuart Siegel, a private counselor in Erie, Pa. While the federal loans have fixed rates ranging from 5 to 8.5 percent, private or alternative loans typically have interest rates that rise and fall with the economy. Rates have been rising recently, which increases borrowers' costs and payments.
If your school allows you to shop (about 80 percent do), explore deals beyond those on the "preferred lender list." Nonprofit lenders such as MOHELA offer "rate relief" and other benefits that can knock as much as 3 percentage points off your interest rate. Websites such as Simple Tuition and Education Finance Council have lists of lenders and benefits.
When shopping for the best deal, check the terms carefully. Many lenders attach so many strings that most borrowers never actually receive the goodies. It's better to take loans that offer upfront discounts, such as waiving origination fees, or immediate discounts, says Taylor.
For more advice and calculators, the counselors also recommend FinAid! and Student Loan Borrower Assistance.
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