Tuesday, January 2, 2007

How to Choose a Nice Student Loan

Looking for savvy ways to finance your education? Then it's time to go shopping - to look at a range of loan options, that is. As interest rates on federal college loans rise and shift to fixed rates, experts say it's more important than ever to accurately calculate the cost of your education, consider all of your financing options and knowledgably select the ones that will be cheapest over time. Here's how to do it:


"A popular mistake students make [when it comes to college loans] is not knowing all their options," says Raza Khan, president and co-founder of MyRichUncle, which offers private student loans. "The challenge seems so daunting, that most students take the first loan option they're offered."

But as of July 1, 2006 federal college loans, which were previously based on market rates, have moved to fixed interest rates. For the PLUS loan, that means an interest rate of 8.5 percent, and for Stafford loans, 6.8 percent. Khan says, if market interest rates go down, private loans may become a better option.

Even if federal loans remain the best deal, Khan says, the cost of education is so expensive that most students need to supplement the federal loans they're offered with private ones. In this case, he warns, "the loans which a university recommends may not be the cheapest financing option available."

A recent "60 Minutes" investigation revealed that some universities offering students particular financing options were receiving kickbacks from the organizations financing the loans. To make sure you're getting the cheapest interest rate, investigate all of your options, including loans recommended by your school and those available from other sources.

MyRichUncle, for example, offers a variety of loans tailored for particular needs, such as those customized for students who need cash to live on when they complete unpaid internships or are studying abroad at international institutions. Recently, the company began offering pre-prime products, which lend to students who lack credit -- and as a result would typically have a hard time securing loans - based upon unconventional factors such as academic performance.


It may sound obvious to recommend choosing the cheapest financing option available, but Mark Kantrowitz, publisher of finaid.org, says often students do not.

"A lot of students will select private loans because the student has the obligation for repayment, even though prior to the change in rates PLUS loans were cheaper," he says.

But, even if the loan is technically in your name, most loans require a parent co-signer. Either way, parents are on the hook - so better to go with the cheapest deal. Kantrowitz also emphasizes the importance of accurately calculating the cost of education. Remember that tuition costs are likely to rise each year, so multiplying the cost of tuition for your freshman year by four won't work.

When looking at private loans, take into account all of the costs associated with them - such as origination fees and the ways in which interest will compound over time (Finaid.org has calculators to help you figure this out). And be sure that you're comparing the lowest rate that you will qualify for with each organization, which may differ from the lowest rate on offer based on factors such as your credit.


If federal rates remain the cheapest option, being savvy can help you save.

"Once you have been in school for two years, consolidate your PLUS loan every year," Kantrowitz says.

Although the PLUS loan is now fixed at 8.5 percent, the maximum interest rate for consolidated loans is capped at 8.25 percent. By consolidating, you'll save a quarter percent.

Kantrowitz also says you'll lessen the amount of dough that the government believes you can afford to spend on college - known as your Expected Family Contribution, or EFC, on the Free Application for Federal Student Aid (FAFSA) - by limiting the amount of money in your name on bank and other accounts.

While the government looks at 35 percent of your own assets in considering your ability to pay for college -- a number that will change to 20 percent on July 1, 2007 -- the maximum they will consider is 6.4 percent of your parents' assets. So spend your own money first.


John Hadeed, a senior studying business management at Fordham University in New York, is keeping his loans in check while he's in school by paying just the interest each month.

"If I waited until I was out of school to start paying, my loans would have gone up by several thousand dollars simply in interest," he says.

You may not be able to pay much while in school - that's the reason for the loan - but small efforts like this can amount to a big difference over time.

Need more information? Finaid.org offers a variety of tools to help, including information on loans and savings, and calculators to estimate the cost of college, your EFC and loan payments. With a bit of work, locking in a better deal could save thousands of dollars over the life of your loan.

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