How to choose the right Student Loan for you?

If you’re thinking about setting off for college soon, then chances are you’re going to start thinking about Student Loans. Education is invaluable but unfortunately, it’s not cheap. You’ll need to consider factors such as how much you’ll need to borrow, the repayment and interest rates, and the repayment terms. But don’t worry - our simple guide is designed to give you an introduction into finding the right student loan for you.

When you’re searching for the right loan, you have two main options: Federal or Private. Obviously, both have their own pros and cons depending on your personal circumstances, but as a general rule of thumb, we recommend exploring all of your federal loan options first. These almost always cost less than private loans and have greater flexibility in the repayment terms. 

Top Tip: Don’t forget to explore your chosen school’s financial aid offers – this can dramatically affect how much you need to borrow with a loan.

Federal Loans

When you start searching for your student loan, you’ll need to complete the Free Application for Federal Student Aid. This will determine your eligibility for federal financial aid. However, it’s important to complete this form anyway, as most schools award scholarships and grants based on the information in the FAFSA.

There are two main types of Federal Loan options for you to choose from:

Perkins Loans

These are subsidized with a fixed 5% interest rate. This is administered through your school and awarded based on your personal financial needs. We recommend this as the loan to take if you are eligible, as it is the best in terms of the debt you will accumulate and offers the most flexible repayment terms.

Direct Loans 

These are also awarded based on your financial needs. Everyone is eligible for Unsubsidized Direct Loans, whilst the Subsidized Direct Loans are awarded based on your own financial needs. Obviously, as a result of this, there is some variation in terms of the amount you’ll need to repay and the terms of repayment.

Stephen Hart, CEO of Cardswitcher and a Financial Advisor thinks that it’s a good idea to carry out some research beforehand: “I would strongly recommend that you explore all of your options for a Federal Loan first. They have the best repayment terms and interest rates for minimizing debt, whilst they are also the most accessible options.” 

Some of the perks include:

• A 6-month grace period for undergraduates. This is an essential time for you to find a job to begin repayments after you graduate.
• Flexible repayments based on income, or other ways of reducing costs such as through teaching.
• Interest rates are typically fixed. This means you can budget easily and you’ll know how much you owe.
• Almost everyone is eligible, with rates determined by your financial needs.

Private Loans

This is where the process gets slightly more complex. There are many different Private Loan options for you to explore, and each will have different interest rates and costs. It’s important to shop around, know your circumstances, and be thorough in comparing rates when you’re shopping for Private Student Loans.

Generally speaking, there are three main types of Private Loans:

- State Agency Loans

These are offered by states to residents, or students attending school in that state. Your school will be able to tell you more information about those available to you.

- Traditional Bank Loans

These are provided by commercial banks. For one of these, you likely need a co-signer and are worth exploring carefully. Your co-signer will be equally as responsible for repaying your debt as you are, so consider who you ask carefully.

- School Loans

Certain schools will have their own loan program. These tend to have fixed rates but will be awarded on financial requirements. Contact your school’s financial aid office for the specifics of their offerings. 

As a general rule, private options have higher costs than federal loans and will require a co-signer to guarantee the loan, so they may not be right for everyone.  Some of the typical features are:

• As with Federal Loans, there is usually a 6-month grace period after graduation before repayments begin.
• Rates tend to be variable. This means they will change over time (either increase or decrease). This can make it harder to budget with a limited income.
• Your eligibility is often determined by your credit score and other factors. As such, you’ll also probably need a co-signer to guarantee the loan.

 Picking the right student loan for you is an essential part of making sure that your education works for you.