After scholarships, grants, financial aid, and other available resources have been applied, you may still have education costs left to cover. Borrowing may be one way to manage that remaining amount, but the loan with the lowest advertised rate or monthly payment is not always the least expensive option.
Before signing a loan agreement, confirm how much you actually need and compare the full cost, repayment requirements, and borrower protections attached to each offer.
Start by Confirming How Much You Need
A college’s cost of attendance and the amount due on its billing statement are not necessarily the same.
The cost of attendance may include both direct charges from the school, such as tuition, fees, campus housing, and meal plans, and estimated expenses such as books, transportation, and personal costs. Review each category and determine which expenses you realistically need to cover.
Then subtract:
- Grants and scholarships
- Accepted financial aid
- Savings or 529 plan funds
- Income you plan to contribute
- Payments being made through a school payment plan
- Other funding you have available
The remaining amount can help you set a borrowing limit. You do not have to accept the full loan amount you are offered, and borrowing more than you need means paying interest on money you may not use.
Red Kite Pro Tip: Review your costs one semester or academic year at a time. Your expenses and available funding may change, so avoid borrowing for future costs before you know what you will actually need.
Compare Private Loans Side by Side
Private student loans are offered by banks, credit unions, state agencies, and online lenders. Eligibility, rates, and terms may depend on the borrower’s credit and, when required, the cosigner’s credit.
When comparing offers, use the same criteria for every lender.
1. Interest Rate and APR
Look beyond the lowest rate shown in an advertisement. The advertised rate may be reserved for borrowers with strong credit, a qualified cosigner, a specific repayment option, or automatic payments.
Review:
- The rate for which you actually qualify
- Whether the rate is fixed or variable
- The annual percentage rate, or APR
- Any discounts included in the quoted rate
- Whether those discounts can be lost
A small difference in the rate can have a meaningful effect when interest accumulates over several years.
2. Fixed vs. Variable Rates
A fixed interest rate remains the same throughout the life of the loan. This creates more predictable monthly payments.
A variable interest rate may increase or decrease based on a financial index. It may start below a fixed rate, but both the rate and monthly payment can rise later.
Before choosing a variable rate, ask:
- Which index controls the rate?
- How often can the rate change?
- Is there a maximum rate or cap?
- What would the payment be if the rate increased?
Private student loans may offer either fixed or variable rates, while federal Direct Loans have fixed rates.
3. Repayment Term
A longer repayment term can lower the required monthly payment, but it generally increases the total interest paid over the life of the loan. A shorter term may cost less overall but require a larger monthly payment.
Compare all three numbers:
- Estimated monthly payment
- Number of years in repayment
- Estimated total amount repaid
Do not evaluate a loan based on the monthly payment alone.
4. In-School Payment Requirements
Some private loans allow borrowers to postpone payments while the student is enrolled. Others require immediate payments, interest-only payments, or a small fixed monthly amount.
Deferring payments may provide short-term flexibility, but interest can continue accumulating. Depending on the loan terms, unpaid interest may later be added to the principal balance, increasing the amount on which future interest is calculated.
Ask the lender to show you how each available repayment option would affect the balance when full repayment begins.
5. Fees and Additional Costs
Review the loan disclosure and promissory note for:
- Origination or application fees
- Late-payment fees
- Returned-payment fees
- Conditions attached to rate discounts
- Other charges that could affect the total cost
A loan with a slightly lower interest rate may not be the better offer if it includes higher fees or less favorable terms.
6. Borrower Protections
Federal student loans include standardized repayment and relief options. Private lenders establish their own policies, which can vary significantly.
Ask what happens if the borrower:
- Loses a job or experiences financial hardship
- Returns to school
- Enters military service
- Becomes permanently disabled
- Dies before the loan is repaid
- Needs to temporarily reduce or postpone payments
Do not assume that a lender offers deferment, forbearance, income-based payments, or loan discharge. Confirm the options in writing.
7. Cosigner Responsibilities and Release
A cosigner is equally responsible for repaying the loan. Missed payments can affect both the borrower’s and the cosigner’s credit.
Some lenders offer cosigner release after the student borrower makes a required number of qualifying payments and meets the lender’s credit and income standards. Release is not necessarily automatic, even after the required payment period.
Before signing, ask:
- Does the loan offer cosigner release?
- How many qualifying payments are required?
- What credit and income requirements must the borrower meet?
- Must the borrower submit a formal application?
- Can deferment or forbearance restart the qualifying-payment count?
Final Thought: Borrow With the Full Picture in Mind
Student loans can help cover necessary education costs, but every dollar borrowed has a future cost. Take time to compare more than rates. Review the repayment term, total cost, fees, protections, and responsibilities included with each loan.
Before borrowing, continue looking for ways to reduce the amount you need. Use Red Kite to explore scholarship opportunities, review college-funding resources, and organize your next steps. Even reducing a portion of the amount borrowed can lower the interest you pay after graduation.
