Student Loan Information

Help please, with first time student picking a lender for a student loan?

what am i suppose to look for in a lender?
do they offer all of the same percentages and benefit’s?

Amanda:

Let’s see if I can help you get a little less overwhelmed – what do you say?

First of all, let’s start with the easy question – subsidized or unsubsidized.

When a loan is ’subsidized’, that means that the federal government will pay all of the interest that accrues on the loan, for as long as you remain in school – and for 6 months after you leave school. If you know anything about how loans work, you know that interest is applied to your balance every month, and either you must pay that interest as it becomes due every month, or it gets added to what you already owe.

With a subsidized loan, the government is doing just that for you – paying the interest as it becomes due every month. What’s that mean? Well – it means you’re going to save a lot of money. If you let the interest pile up, unpaid, you’ll find that you owe a lot more than you started out owing, by the time you get out of school, and start paying your loans back in a few years. With a subsidized loan, you’ll owe exactly what you borrowed, and nothing more. This could potentially save you several thousand dollars.

You don’t get to choose whether you want a subsidized loan. The subsidized loans are a special form of financial aid that your school can only offer if you qualify. There is a $3500 limit to the total amount of subsidized loan you can borrow in your freshman year, so if your school is offering you both a subsidized and unsubsidized, they believe that you’re going to need both. If you agree, take them. The total of both Stafford loans can’t exceed $5500 this year. Next year, you’ll get to borrow a little bit more.

If you were offered Stafford loans (either type), your school will provide a list of recommended lenders, but you don’t need to choose one of those. However, because the Stafford loan is a government program, all of the participating lenders make those loans according to the same basic terms – you won’t find much difference from one lender to the next.

The government allows participating lenders in the Stafford program to charge you lending fees that are supposedly related to the lenders’ cost of making these types of loans. That’s your origination fee.

The government also charges you a small amount for “insurance”. With any Stafford loan, the government guarantees the lender that the loan will be repaid. To make that possible, the government charges every borrower a small fee for guaranteeing the loan – that’s your guarantee fee.

Those won’t differ from lender to lender. Both fees will be subtracted from your loan before it gets sent to the school.

Don’t confuse a Stafford loan with the other major type of educational loan – those are known as “private” or “alternative” loans. Thanks to the government’s guarantee of the Stafford program, the lenders are more than happy to trust you with their money – they won’t ask you for information on your income, or your debts, or your credit history. Private loans are not guaranteed, and therefore, the lenders will only make those kinds of loans to borrowers that can satisfy their very conservative lending policies.

Chances are that you will not be approved for a private loan unless you can provide a cosigner.

When you are choosing your Stafford lender, be sure that you’re applying for a Stafford, and not a private or alternative loan.

Perhaps the only differences you might find with the lenders on the Stafford is that some of them will reward you with a small interest rate discount if you sign up for the auto-debit payment program. With that arrangement, the lender will automatically deduct your payment from your checking or savings account every month. That gives them security, so it’s worth their while to offer a discount in order to entice you to sign up. Don’t worry – your payments won’t be due until 6 months after you leave school – it will be a long time before your lender starts making its withdrawals.

One more difference to look for, but it’s a little complicated. You’ll want to see how many times each lender says it will “capitalize” your interest. In the simplest way of looking at it, “capitalization” is when the lender adds the interest to the balance of what you owe. Lenders who only capitalize your interest one time would be preferable to lenders who capitalize it more frequently. Again – it’s a little complicated, and it won’t apply to your subsidized Stafford, because remember – the government will be paying that interest for you, anyway.

Good luck – I hope this helped you understand.