How to Choose a Student Loan


As you start to evaluate your loan options, here are a few things to think about.

  • Interest rates. The higher the interest rate, the more your payments will be. Consider whether a fixed rate with a steady payment or a variable rate with lower initial payments is the best fit for you.
  • Fees are kind of like up-front interest. A good rule of thumb is that every 4% in fees is the equivalent of about a 1% increase in the interest rate on a 10-year loan and about a 0.5% increase in the interest rate on a 30-year loan
  • Who’s borrowing. Some loans are borrowed by the student, some are borrowed by the parent, and some require a cosigner (which usually means the student and parent are equally responsible for the loan). Depending on the type of loan, the borrower’s credit score may impact the loan rate.
  • Eligible expenses. Some loans are limited to institutional costs like tuition and fees, while others can be used to pay for living expenses, books, and personal expenses. You may need a combination of loan types to cover your total cost.
  • You’ll want to consider the timeframe required for repaying your loan, whether or not there are any penalties for early repayment, and what repayment options (such as interest only, deferments, or graduated repayment plans) are right for your needs.

There are two basic types of loans you can use for education costs: federal student loans and private loans.

Federal Loans

Most sources will tell you to borrow federal loans first, private loans second. That’s because everybody gets the same fixed rate with a federal loan, making it less expensive for most people. Unlike a private loan, federal loan rates don’t depend on your credit.

Federal loans are usually the best option for undergraduates who are borrowing on their own, because there’s no requirement to have a cosigner.  Federal loans are also a good choice if you are concerned about your ability to make payments after graduation, because they offer the most flexibility when it comes to repayment.

Having more repayment options might not sound like a big deal now, but it will be when you’re getting ready to graduate. If you aren’t able to find a job right away or end up starting at a low salary, the repayment options offered by federal loans can help you avoid defaulting and keep your credit good. Federal student loans also offer loan forgiveness programs.

There are 2 types of federal loans: subsidized and unsubsidized.

With a subsidized federal loan (like a Stafford loan or Perkins loan), Uncle Sam takes care of paying your loan interest while you’re enrolled in college full-time and for a certain time period after graduation. The federal government also picks up the tab for interest during some types of deferments.

With an unsubsidized federal loan, you’re responsible for all of the loan interest. Interest will be charged and added to your loan costs throughout the time you have the loan, regardless of whether you’re in school or have a deferment. You can defer your interest payments until graduation though.

Your school’s financial aid office determines the amount you can borrow through federal loans. With subsidized federal loans, it’s based on your financial need. With unsubsidized federal, the amount is based on other financial aid and attendance costs.

Federal loans typically have an origination fee, so when you’re considering your federal loan options you’ll want to compare both the rates and the loan fees.

Private Loans

Most people use private loans to cover the difference between what their total education costs are and what they’re able to cover through federal loans, scholarships, savings, or other means.

Unlike federal student loans, you don’t have to be pursuing a degree or certificate to qualify for a private student loan. You can use private student loans for continuing education, previous school charges, or education-related costs incurred after graduation (like bar exam study costs for law school graduates). They’re also a great option for international students who aren’t eligible for federal student loans.

With a private loan, your interest rate depends on your credit score. For most borrowers, this means the rate will depend on the credit score of the family member who is cosigning the loan with them. The good news is that most private loans don’t charge an origination fee.

Unlike federal loans, most private loans require you to start making payments while you’re still in school. When looking into private loan options, be sure to ask about things like extended repayment term options (which can lower your monthly payment) and interest-only payment options.

With a private loan, you’ll need to decide between a fixed rate that stays the same for the entire payback period or a variable rate that adjusts over time. The benefit of a fixed rate is that you’ll know exactly how much your payments will be each time. With a variable rate, you have less predictability in the long run but you’ll usually be able to get a lower rate up front.

You aren’t limited to just using private student loans for education expenses. You might also want to explore options like a second mortgage, home equity loan, or personal loan. No matter how you decide to finance your education, U of I Community Credit Union is here to help!

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