The Right Loan For You
You're entering college. There will be classes to choose, roommates to meet, and also the small matter of that tuition bill that needs to be paid--anywhere from a few grand to five figures. A student loan will help. But with dozens of lenders out there, does it matter which loan you choose?
The good news, for now, is that with interest rates at historic lows, most students can't be steered too far wrong. But it's still possible, by heeding some simple lessons, to save a few hundred dollars.
The first thing to keep in mind when navigating the loan maze is that there are two federally backed programs that help make loans available. The direct-loan program is simple enough: At colleges that participate, students borrow straight from the government. At other schools, students borrow from a lender--such as Citibank or Bank One--as part of the Federal Family Education Loan Program, or FFEL.
Multiple choice. At FFEL schools, there are more choices and potentially more pitfalls. Financial aid officers at these schools usually steer students to their "preferred lenders." Lesson 1: You may choose none of the above. Schools select favorite lenders because it's more convenient for the school to deal with a single company, such as Sallie Mae. Sometimes students get better loans as a result. Other times there are better deals available.
For example, many nonprofit organizations and state agencies with excellent reputations offer low-priced loans. For graduate students, the nonprofit Access Group offers no-fee federal loans. For undergraduates, the Pennsylvania Higher Education Assistance Agency (PHEAA), the Michigan Higher Education Student Loan Authority, and other government agencies offer no-fee loans and sharp interest-rate discounts to students who are either from that state or attending school in it.
Lesson 2: Read the fine print on interest-rate deals. Most lenders will offer to cut or waive origination fees or dangle a lower interest rate. The fee cuts mean real savings. But most lower-interest-rate deals require students to make a long series of on-time payments. For graduates hunting for a first job, that's tough. An internal study by PHEAA showed that only about 7 percent of borrowers managed two years of perfect on-time payments. Miss a payment, and lose the deal on the rate.
At schools that participate in the direct-loan program, students borrow from the government through the school aid office. The government is not allowed to match all deals offered by lenders, but it can cut fees by more than half.
Lesson 3: Explore repayment options. Another key benefit of direct loans: They allow for repayment plans that are tied to a graduate's income, a benefit designed to help students who take public-service positions (but open to anyone with a low-paying job) by slashing monthly payments. After a set time, currently 25 years, the remainder of the loan is forgiven. -Julian E. Barnes
This story appears in the October 27, 2003 print edition of U.S. News & World Report.