How Do I Know Which Loan Is Right For Me?
Several factors will help you determine which loan program(s) might be best for you and your family. Here are some things to consider:
1. Are there some types of education loans that are ALWAYS better than others?
Yes! If a student is eligible for a Federal Direct Subsidized Loan (and not all students are), the students should absolutely accept that loan before considering other loans. This loan will not begin accruing interest until the student ceases half-time attendance or graduates college, saving money! Other education loans (Unsubsidized Direct, PLUS, CAL, and private) begin accruing interest as soon as they disburse.
2. Does it make more sense for the education loans to be in a parent’s name or in the student’s name?
Obviously, this is an important discussion for parents and students to have, and every family is different. Some parents have the ability and willingness to borrow in their own names for college costs while others do not. If a parent can’t or doesn’t want to borrow in his or her own name, one of the other loan types (CAL for Texas students, or a private loan) can be used and the parent or another credit-worthy adult can serve as a cosigner for the student.
Some families want students to begin to establish credit history while borrowing loans for college. This will happen if the loan is in the student’s name and the lender reports to credit agencies, as is the case with private loans. Even if the student is lucky enough to have parents or other relatives willing to actually pay these loans back, the student will gain positive credit history with on-time repayment. If the loan is in a parent’s name, like the Parent PLUS Loan, the student’s credit will not be impacted either negatively or positively.
3. Is it more important to get the lowest interest rate possible even if it’s variable, or to get a rate that is fixed (will not change)?
This is a personal decision, depending on a person’s risk tolerance. With a fixed rate like the Federal or state loans (PLUS or CAL), the rate is the same for all approved borrowers/ cosigners. If you have very good credit, you get the same interest rate as someone who barely passed the credit check. It’s possible you could get a better rate on a private loan. If your credit is not quite so good, the CAL or PLUS may be a better option for you. If you have good credit, it might be worth your time exploring whether a private education loan would give you a lower interest rate (and usually no fee). If you apply and don’t like the terms, you don’t have to sign on the dotted line!
Whether to select a fixed or variable rate loan could also be impacted by how long you think it will take you to repay the loan. In general, while education loan programs typically have specific repayment periods, some families pay the loans off within a shorter time. The less time you spend repaying a loan, the less risk there is that any variable rate will go higher over time. If you anticipate that it will take you 10 years or more to pay off the loan, it’s harder to predict what variable interest rates might do over that longer period of time. Most private loans are based on either LIBOR or Prime. The Prime rate has not changed since 2008 (http://www.bloomberg.com/quote/PRIME:IND). The LIBOR rate has adjusted over the last few years, but by very small amounts. No one can predict the future, but knowing how likely it is that these rates will rise might help you make a better decision about choosing a variable or fixed rate loan.
4. What else is different about private education loans versus Federal loans?
Some of the benefits of Federal loans are the variety of built-in repayment options, postponement of payment in certain circumstances, and even possibilities of limited loan forgiveness. These types of cancellation provisions for certain work or service are not available for either state loans (CAL) or private education loans.
Repayment Options: See the list of all possible Federal loan repayment plans here https://studentaid.ed.gov/sa/repay-loans/understand/plans Note that some of these plans are only available for student loans, not parent loans.
Payment postponement: If you are enrolled in school at least half-time, are in active military service, have a documentable economic hardship, or are unemployed, you may have the right to apply for a Deferment or forbearance to temporarily postpone your loan payments. For more information, see https://studentaid.ed.gov/sa/repay-loans/deferment-forbearance
Loan Forgiveness/ Discharge/ Cancellation: Note that the following applies only to student loans – Parent PLUS Loans can only be canceled in the event of the borrower or student’s death or total and permanent disability.
Public Service Loan Forgiveness (https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/public-service) provides forgiveness of a borrower’s Federal loans after 10 years of on-time repayment, IF they are in either the Income-Based or Income-Contingent repayment plans AND the student has been employed full-time for those 10 years by a Public Service entity (most Federal, state, county, and local agencies qualify, as well as other public and private non-profit companies).
Students who become classroom teachers have possibilities for student loan forgiveness (https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/teacher) as well as cancellation of Federal Perkins Loans (https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/teacher#teacher-cancellation) if they work at schools which serve low-income families for five years.