How to Choose the Right Education Loan for Your Family
A college education is a big investment for families that can yield a great return in earning potential for the student over time. After utilizing savings and cash on hand to pay the college bill, families often find themselves needing an education loan to cover the remaining college expenses. It's important to do your research and understand the terms and full cost of borrowing before committing to a loan. I've helped hundreds of families create college payment strategies over the years and there are a few key points every borrower on the loan should understand.
1. Know the total cost of the loan
Look at the full range of the interest rates before you apply, not just the lowest advertised rate that few qualify for. Most lenders display a range of interest rates on their website based on repayment options. It's important to know that most people don't receive the lowest rate even if they consider themselves to have excellent credit. The rate most people receive is generally somewhere in the middle. As well, the repayment option that you select can impact your total borrowing cost. Deferring your payment on a student loan, rather than selecting an immediate repayment option, may significantly raise how much you end up paying back over time. MEFA provides families with resources and tools to review various scenarios and the associated costs. Check out MEFA's Student Loan Payment Calculator. I use this tool all the time to help families understand and compare the various repayment options available based upon their credit profile. The tool allows families to view interest rates, monthly payments, and total costs before they apply.
2. Good credit is key
Beyond Federal Direct Student Loans, most education loans require the borrower(s) on the loan to have good credit. The credit profile of the borrower(s) and repayment option chosen often dictate the interest rate and total cost of the loan over time. The higher your credit score, the lower your rate. Undergraduate students will usually need a credit-worthy co-borrower for approval. Most lenders will allow more than one co-borrower to help increase chances of approval and the possibility of a lower rate.
3. Read the fine print
Every private loan lender is required to provide an Application and Solicitation Disclosure, which details the total cost of the loan, including fees, before the student/family applies. These disclosures are available on every lender's website. Many lenders advertise that they don't charge an origination fee. However, if they charge other fees, such as late payment fees, you will find them on the disclosure. View MEFA's recent webinar on Comparing College Loan Options to learn more about reviewing and understanding the disclosures. You will also find the current federal loan rates on these disclosures including the Federal PLUS Loan. Some colleges may add a PLUS Loan on a financial aid offer as an option to pay the bill. However, keep in mind, a PLUS Loan is not financial aid and may often be more expensive than a loan through a non-profit lender. The PLUS Loan may be a useful tool for families who have experienced credit difficulties, and also offers certain federal benefits not available with private loans.
4. All borrowers have equal responsibility
From a credit standpoint, everyone who is a borrower on the loan has equal responsibility to pay it back. It's important to have an understanding among all borrowers who will be making the payments on the loan over time. If a payment is missed, it will impact the credit of all the borrowers on the loan including the student borrower. On the flip side, students may establish good credit if payments are made on time, and thereafter can consider refinancing their loans once they have an established credit history and have shown they have the income to make the loan payments. This may allow them to remove their co-borrowers from the loan. However, not all parent loans may be refinanced by the student. The Federal PLUS Loan is not co-signed by the student and may only be refinanced or consolidated by the parent on the loan.
5. Every family is unique
Utilize a loan and repayment option that is best for your family. Think about your family's budget and how much you can realistically afford every month. While it may be easier to defer loan payments, the interest rate on a differed repayment option may be higher than choosing an immediate repayment option. If you can swing more than the minimum loan payment, then borrow less and use some of that cash on hand to pay the school directly or utilize the school's interest-free monthly payment plan. If you can pay the interest on the loan while the student is in school, that will help reduce the total cost of the loan. Some families may have multiple children in school or a tight budget and a deferred repayment option may work best. You can still make larger or voluntary payments to reduce the total cost of the loan regardless of what repayment option you choose. There are no prepayment penalties on education loans.
MEFA has tools, resources, and guidance available to assist families with college financing. If you have questions about MEFA financing options, including the MEFA Loan or need help finalizing a payment strategy, don't hesitate to reach out via email to firstname.lastname@example.org or phone at (800)-449-MEFA (6332). My colleagues and I look forward to assisting your family!