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05.07

How to Choose a Student Loan

By Arie Sowers

Many students’ financial aid packages include loans, all of which must be repaid with interest. Some loans, such as Stafford and PLUS loans, are supported by the federal government, which sets maximum interest rates for those loans. Choosing one can be daunting, but if you understand a few basics, you can usually find a loan — or loans — right for you.

First, always maximize your borrowing from federal loans before tapping into private student loans. Here’s why: interest rates on federal student loans are limited to a relatively low percentage. That’s not the case with private loans. Also, interest on private loans may be added to the loan principal more often, increasing the — of money you are ultimately charged.

Approval and terms for private loans are based on your credit history. If your rating is bad or non-existent, you might need a cosigner to qualify. Poor or minimal credit may also result in a higher interest rate on your loan. Additionally, fees and penalties can be higher than with government-backed loans and your repayment terms may not be as favorable. All in all, the smart thing is to use private loans only as a last resort — and to make private loans as small a portion of your financial aid portfolio as possible.

If and when you do need a private loan, consider your options. You have plenty of choice — there are dozens of lenders and loans for students in the market. Investigate your options carefully, considering factors like total cost of the loan (how much the loan will add up to after all of the interest and fees have accumulated), interest rate, borrower benefits (such as cash back or interest rate reductions that may be conditional on making payments on time or using automatic deductions from a bank account), and the lender’s customer service record.

If you are about to graduate and have student loans to pay back, consider consolidating your loans. Consolidation means that you take your outstanding federal student loans (even just one) and bundle them into one new loan with one monthly payment. The new rate is fixed — meaning it won’t change — and the length of the loan can be extended up to 30 years, which can lower the amount of your monthly payments. It’s a kind of refinancing of your federal student loans. You may discover this makes perfect sense for your financial situation or, after checking out the pros and cons and examining your career and life plans, loan consolidation may not be right for you at this point. The important thing is that you are thinking about your future, comparing the consolidation options available, and determining what makes sense for you. Given the time, work and money you’ve put into your education, this is a smart move.

The IEEE has partnered with SimpleTuition to provide IEEE members an online student loan comparison solution at www.simpletuition.com/ieee. This site can help borrowers compare loan options for private, PLUS, Graduate PLUS and consolidation loans, and using it is free!

Arie Sowers is marketing manager at Simple Tuition in Newton, Mass. Comments may be submitted to todaysengineer@ieee.org.