When borrowing money to pay for college, it’s a good idea to know as much as you can before you take a loan.
To begin, work with your college’s financial aid office to maximize all federal student loan options before you look to other financing. Federal student loans are your best option because they offer a guaranteed fixed interest rate, can be consolidated, and feature multiple repayment options.
If you plan to borrow beyond the federal student loan program, it’s important that you do your homework and compare all of the available options. Review the tips on private education loans below to get started on the right track.
- Know Your Credit Score: This is an important factor when applying for credit-based loans. By finding out your credit score ahead of time, you can take measures to improve it (if necessary) before applying for MEFA, Federal PLUS, or any other credit-based loan.
- Don’t Borrow More than You Need: Review your bill or estimate your balance due with MEFA’s College Cost Calculator. Pay what you can from savings and then ask your college if they offer an interest-free monthly payment plan to split the balance into smaller installments. Use loans only as a last resort.
- Don’t Borrow More than You Can Afford: Find out from the lender what interest rate you qualify for, what your monthly repayment will be, and the total cost of the loan. If you expect to borrow again for future college years, your cumulative costs are likely to increase substantially. And if you expect your income or other expenses to change in the future, this may also affect the amount you can afford.
- Pay Attention to Fees, Terms, and Conditions: Read the fine print for additional fees, which can boost the Annual Percentage rate (APR) and increase your overall cost of borrowing. You might be able to lower your interest rate by selecting immediate repayment, choosing a shorter repayment term, or having a co-borrower. Find out if there are hardship or forbearance options in the event that you encounter financial difficulties during repayment.
- Get The Advice and Support You Need: Private education loans and lenders aren’t one-size-fits-all. Read the fine print and, if you don’t understand something, ask for an explanation. Look for a lender that’s transparent about its programs, will help you choose the right loan product for your financial situation, and provides helpful answers when you need them.
Other Borrowing Options
You may have access to sources of credit other than private education loans. If so, make sure that you are aware of their benefits and drawbacks in advance:
- Home Equity Loan: Taking out a home equity loan may be an option for those with sufficient equity in a home or other property. Such a loan may tax benefits not available on a private education loan and the repayment schedule may be stretched over thirty years. However, since the property serves as collateral, you risk losing it if you default on repayment.
- Credit Cards: Your college may allow you to pay for tuition and fees by credit card. At first glance, this can seem appealing for consumers who earn credit card rewards such as airline miles. But if you don’t quickly pay the balance off in full, you may be subject to interest rates that are much higher than private education loan options. Carrying a high balance also may have a negative impact on your credit score. And some colleges impose a convenience fee on credit card payments.
If you are considering financing any of your educational expenses, read the fine print on the lender’s application and solicitation disclosures. Here are some terms that you will probably encounter:
- Financing: Borrowing money, in the form of loans and credit, which you must repay with interest.
- Annual Percentage Rate (APR): The APR reflects the total cost of borrowing money over the life of the loan. It takes into account not only the interest rate but also the length of repayment and any fees associated with the loan.
- Co-Borrower: This is a person who signs the loan application and loan note along with the primary borrower. A co-borrower might improve your chances of being approved or help you qualify for better terms, which is especially important if the student is the primary borrower. Keep in mind that the co-borrower shares full responsibility for repaying the loan if the primary borrower falters during repayment.
- Immediate, Interest-Only, and Deferred Repayment: With immediate repayment, your first payment will be due soon after the loan funds are fully disbursed to the school. Interest-only loans start with low monthly payments while the student is enrolled, and then increase the amount due after the student graduates or leaves school. Deferred loans generally don’t begin repayment until after the student has graduated or left school. Lower interest rates may be available if you start repaying sooner, and earlier repayment also reduces the total cost of the loan.
- Tiered Pricing: With some lenders, borrowers might be charged an interest rate or fees that are higher than advertised. The lowest advertised rate may be available only to those with exceptional credit, while higher rates and fees may apply to those with fair to average credit ratings.
- Fixed vs. Variable Interest Rate: A fixed interest rate doesn’t change during its term, so your monthly payment will remain the same for the life of the loan. With variable-rate loans, the interest and your payments may go up or down over time, depending on the current market interest rates or other benchmarks. Often there is no cap on how high the variable interest rate might go.
An Invaluable Resource
MEFA is here to help. Our mission for more than 30 years has been to support the college aspirations of anyone who resides or attends college in Massachusetts. If you have a Massachusetts connection, don’t miss out on the benefit of our free services and low-cost loans. Learn more about our undergraduate loans and graduate loans for current students, and our education refinancing loans for those borrowers who have begun repaying student debt.