How to Determine the Best Choice for You

It is very important (and may save you time and money down the road) that you very carefully consider the characteristics of the many lenders and educational loan programs available to determine which is best for you.  Each application or brochure may look different, but all have basically the same loan characteristics.

Interest Rates

Most alternative educational loans have a variable interest rate.  There are some that have a fixed rate and some that have a rate cap, which means the interest rate can fluctuate up to a specific percentage while you are repaying the loan.  Your goal is to find the lowest interest rate with the lowest cap.

• Look for fixed interest rate loans; the payment amount will be constant and unsurprising.
• If the interest rate is variable, find out how often the rate could change.  Once?  Quarterly? Annually?
• If the interest rate is variable, find out if the payment starts low--so that it might seem attractive--but balloons later to unmanageable monthly payments.
• Determine if the rate is linked to a published rate such as the Prime Rate.  This could tell you how often it might change.
• Ask for estimates of total interest charges.
• Find out if there are any period during which interest isn't charged.

Fees

 Most loans have a variety of fees associated with them.  Fees for originating the loan and fees for insuring loans are the most common.

• Make sure you understand all of the fees--ask the lender to explain each one if you don't.
• Ask if the fees are deducted from the amount you are borrowing, if they are in addition to that amount, or if they are "out of pocket."  If the fees are not "out of pocket," you will probably have to pay interest on the fee amounts.
• Find out if the fees are based on a percentage of your loan or a flat fee regardless of the amount you are borrowing.
• Determine if there are any service charges over the life of the loan.
• Determine if and how late fees are assessed.

Term

Each alternative educational loan may give you a different length of time, or term, in which to repay the loan.

• Understand that you will pay more in interest on a longer-term loan.  A 20-year loan with low payments may look great, but it will cost you much more over the long term than the 10-year loan with slightly higher payments.

Discounts or Benefits

Most lenders will offer discounts or benefits to their borrowers to increase the attractiveness of their loan product over the competition's product.  These benefits can offer you tremendous incentives, so check them out and compare them between lenders.

• Determine if you can get an interest rate reduction or an account credit for making payments on time.
• Find out if an additional reduction is available if you make electronic payments.

Repayment Schedule

Some lenders may offer different repayment options.  The standard plan is to pay the same amount every month for the life of the loan.  This may not work best for you, based on your current or anticipated income (when you start repayment).  A graduated plan may be offered that starts with a lower payment that grows to a larger payment over time, hopefully corresponding to increases in your income.

• Consider carefully your financial situation before varying from the standard plan.
• Ask the lender what impact a variable rate may have on any graduated plan offered.

Customer Service

Many lenders focus on customer service when they are trying to get your signature and then lose that focus afterwards.  You should be concerned about that:  over the life of the loan, you are going to have questions and concerns, and you are going to need to update personal information on occasion.  And, there is nothing worse than bad customer service or reaching voice mail rather than a live operator when you need help.

• Does the lender offer toll-free customer service?
• What hours are knowledgeable representatives available to answer your questions?  Do those hours include nights and weekends?
• How long is the average wait to talk with a representative?
• Will the lender accept e-mail and fax inquiries?  If so, how long does it normally take for response?
• Does the lender offer online access to your account information?

Reputation

The lender's reputation is also important when considering educational loans.  You may know the lender's reputation already--perhaps because your family has done business with the lender for generations.  On the other hand, if you are unfamiliar with the lender, it may be worth your while to learn a little about the lender.

• Remember that there is truly a difference between dealing with a reputable lender and a "loan shark".
• Research the lender's track record and strength.  Check the history of its stock, if publicly traded.
• Determine if your school would recommend this lender.

Other Questions You Should Ask

• Does the lender offer online applications? (alternative loans)
• Does the lender offer "instant" loan approvals? (PLUS or alternative loans)
• Does the lender usually sell loans to a secondary market?
• Does the lender require collateral for this loan? (PLUS or alternative loans)
• Does the lender consolidate loans?
• How quickly does the lender process the loan?
• How quickly does the lender disburse loan proceeds?
• Do you need a credit check? (PLUS or alternative loans)
• Do you need a co-borrower or cosigner? (alternative loans)
• Must you already be a customer of the lender to borrow?
• What is your borrowing limit?
• Can you defer interest payments?
• Is your interest deductible from your taxes?