Student Loans

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Last updated May 2024
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How to Choose a Student Loan

A college education can be a wise investment for the future leading to a professional career and a comfortable lifestyle but it comes at a price. The majority of students have no alternative but to fund their studies with loans. Starting out in life with debts amounting to thousands of dollars can be daunting, so it's important to choose the right type of loan from the outset to minimize the burden.

What is a Student Loan?

Attending college can often mean living away from the family home for the first time. The expenses incurred in renting an apartment, a daily living allowance and essential study equipment all need to be provided for. A subsidized or unsubsidized federal student loan frequently falls short. A few hours work each week and limited financial assistance from parents is rarely enough funding so taking on a student loan is unavoidable. However, it's vital not to borrow more than necessary. A general rule is to ensure monthly repayments match around one tenth of your future earnings for each month. There are convenient online tools to help you with your calculations. Due to there not being a definable asset involved when borrowing money for an education, a student loan is unsecured and generally incurs a high interest rate.

What you Should Know Before Applying for a Student Loan

An ideal student loan should typically include a low interest rate, affordable fees and flexible repayments. A major consideration is the type of interest being applied to the loan. Variable interest for student loans usually commences at around 3.12% APR compared to 4.07% APR for a fixed interest rate. By comparison, a federal student loan charges fixed interest at around 4.53%. Although a variable interest rate might appear more economic it's unstable and can frequently increase by up to 2% per annum. It's often easier to budget for the future with a fixed interest rate which remains unchanged throughout the entire life of the loan. Student loan fees are paid as a type of deposit. These can vary between lenders but as a guideline federal student loan fees are around 1.059%.

How to Apply for a Student Loan

Private student loans are similar to any other type of loan and largely rely on credit scores which should preferably be in the region of 700. However, as most students don't have a credit score an alternative is to have a co-signer such as a parent. This places the co-signer in a position of equal responsibility for the loan if repayments are not met on time. Some loans include a co-signer release clause which relieves your co-signer of liability but only after a designated number of punctual repayments which can be as high as thirty-six months. Another factor to consider is debt to income ratio. Your application is usually viewed more favorably if you have employment or a confirmed job offer.

Student Loan Refinancing

Students frequently acquire several loans such as a Federal Unsubsidized loan, a private loan and multiple credit cards. With so many repayment schedules at different interest rates, it's a system that can often prove expensive and difficult to manage. An alternative is student loan refinancing where one new loan replaces all others. A typical refinancing loan can be from $20,000 to $200,000. Generally low interest rates of around 4% enable your money to stretch further to reduce your outstanding balance or invest for the future. During the refinancing loan's contract there can be typical savings of more than $20,000 on some loans when compared to a set of individual loans. An average refinanced student loan could be a ten year contract with an average 3% interest. It could result in lowering monthly repayments by up to $200 with a total saving of almost $30,000. The Federal Government cannot offer refinancing but a private student loan refinancing contract does cover federal student loans. Applications for student loan refinancing are often conducted entirely online. However, as a private loan your success relies on a high credit score of at least 650 from either yourself or a co-signer. You might be able to find refinanced student loans that offer early co-signer release after just eight months of punctual repayments and full-term contracts from a minimum of five years.

How to Choose a Lender

There are many financial institutions which offer student loans including traditional and online banks. Choosing a credit card student loan usually incurs interest rates in the region of 12% or 13% but as the debt decreases the loan becomes relatively less expensive as the interest is calculated on the outstanding balance. Another alternative is a credit union which is a not for profit organization. Consider features such as co-signer release, early re-payment plans and low interest rates and fees. Loan repayments can be between five and twenty years. Always thoroughly research both student loans and student loan refinancing options to find a solution that is the most suitable for your circumstances. No one ever knows what surprises the future may have in store and the best laid plans can often go unexpectedly awry. When organizing your student loan finances, it can be to your long-term advantage to consider options that provide the most flexibility and the maximum savings on your student loans.