How to Pick The Right Student Loan

One of the biggest financial investments you’ll ever make? College. One of the biggest financial risks you’ll ever take? College debt. Make sure you find the right student loan that works for you. Why? Graduating from college with large amounts of debt doesn’t set you up for financial success—it sets you up for more debt. Manage your loans the right way by making sound decisions. Consider these four strategies as you pick the right student loan—and a manageable debt load.

1. Federal v. Private

First thing you need to do is decide whether you want federal loans, private loans, or a combination of both.

If you’re an undergraduate borrowing on your own, go for a federal loan. Federal loans are generally safer than private loans—they’re less expensive and they have flexible repayment options. You can also avoid defaulting on them, which will protect your credit score.

How do they work? Put simply, the federal government pays the interest on federal subsidized loans, like the Stafford and Perkins loans. The government may also pay the interest during certain periods of deferment. And, depending on your loan and career choice, you may qualify for a loan forgiveness program.

Why would you choose a private loan? If your credit score is high—at least 740—and you have a co-signer, then some private loan options might work better for you than federal loans.

Compare fixed and variable rates—if you plan on paying off your loan longer than its term, some of those variable rates might be appealing to you. The other thing to consider? Loan fees. Run a compare and contrast of your options.

Feeling unsure? Contact your university’s loan office and ask to speak to a Financial Aid officer.

2. Loan Calculator

Use one. These are especially helpful when you’re comparing and contrasting rates and fees for private and federal loans.

The Repayment Estimator on StudentLoans.gov is helpful because it tracks your monthly payment based on all the variables and types of loans involved. Get a clear sense of what you’ll pay, how often, and for how long.

Make sure that your numbers are similar to the statement from your Financial Aid office. If they’re not—ask. Figure out why before you sign anything.

3. How much $$?

Decide how much you want to borrow—because that will be the amount you owe, plus interest, fees, and any other loan-related expenses.

Beware the variable interest rate, typically found in private loans. Variable interest rates do as their name implies. They change. They increase over time.

Borrowing a lot of money from a private lender can work, even with a variable interest rate provided you know that you’ll have the resources to pay it back quickly—don’t let that interest rate vary too much.

4. Loan Repayment Plan

That loan calculator (see #2) will start the process of thinking about this. For private loans, your repayment is often decided before you take the loan. Be sure to read the fine print before you sign anything on a private loan.

Your goal? Pay as little interest as possible. What does this mean? Pay down your loans quickly, so less interest accrues.

For federal loans, there are three main types of loan repayment plans:

a. Income-based: pay 10-25 percent of your discretionary income over 25 years

b. Pay-as-you-earn: pay 10 percent of your discretionary income over 20 years

c. Income contingent: pay a combo of a and b

You can also prepay your federal student loans provided you have sufficient income, or access to funds.

Deferring is another option—but a potentially dangerous one. You can apply to put off paying back your loans for reasons like illness, further education, major injuries, and unemployment. Deferring doesn’t erase interest, though. Deferring often increases your debt burden. Better not to defer, unless you can’t avoid it.

Confused? Don’t be. While the loan process is daunting, go step-by-step, and make sound decisions. Ask questions when you have them. If it sounds too good to be true, it probably is. If the people you ask don’t give you clear answers, find someone else to work with. It’s your money—and your future.

Remember: don’t sign any paperwork unless you feel confident that you know what you’re getting into. Debt doesn’t go away on its own. It’s yours. Know what you’re buying—and how you’re buying it. You’ll thank yourself later.