Whether you’re going for an undergraduate degree or pursuing grad school, skyrocketing tuition costs mean few students can avoid borrowing student loans. To save the most money, it helps to borrow wisely.
Knowing how to compare student loan options like repayment terms and interest rate types can save you thousands in the long run. But scrolling through hundreds of pages of fine print to compare various offers, especially if you don’t understand all the factors that go into a loan, is a monumental task.
Never fear. Just keep an eye out for these crucial factors to consider when it comes to the overall costs and benefits of borrowing a student loan.
Comparing Federal Student Loans vs. Private Student Loans
Federal student loans come from the United States Department of Education, whereas private student loans come from private companies — typically banks or credit unions.
On federal loans, the law establishes fixed interest rates independent of your credit score. Federal loans also come with various repayment plans, generous deferment and forbearance options, and a long list of borrower protections. And they come with options for loan forgiveness.
Private student loans rarely have repayment options for financial hardship, have limited deferment and forbearance terms, come with few borrower protections, and never forgive any amount of debt balance.
It’s also rare for most borrowers to score a lower interest rate on a private student loan than on a federal loan.
That’s because federal student loan rates are already typically low, and the best interest rates for private loan borrowers go to the most creditworthy. But most undergrads haven’t had time to establish a credit history. And even grad students usually need a co-signer to qualify for the lowest rates.
Thus, you should always exhaust your options for borrowing federal student loans before turning to private ones. To learn more, read our article about the differences between federal and private student loans.
That said, many students must rely on private student loans to pay for what federal loans won’t cover or finish school. But don’t immediately go with the first offer or the one with the lowest interest rate. Instead, compare offers from various lenders to ensure you get the best deal.
How to Compare Private Student Loan Offers
Private student loan lenders offer different loan structures to choose from. They compete for your business by offering competitive interest rates. But they also offer various borrower benefits to attract customers.
To get the best deal, you should compare as many loans as you qualify for. That sounds like a lot of work, but you can use an online marketplace like Credible, which matches you with prequalified rates from up to eight lenders without impacting your credit score.
Then compare your offers by focusing on these primary factors affecting what you’ll ultimately spend.
1. Interest Rate
The interest rate is the primary factor that affects the overall cost of your loan. Interest is the percentage you pay back to the bank in exchange for them loaning you money. And the lower your interest rate, the less your loan will cost you.
For example, if you borrow $10,000 at 3% and pay it back over 10 years, the loan will have cost you under $1,600 in interest. But if your interest rate is 5%, that same loan will cost you almost $3,000.
That’s why shopping around for the lowest possible rate is critical. Even a couple of percentage points can significantly increase the cost.
Most private lenders let you choose between variable- and fixed-rate loans. There are potential pros and cons to both.
Generally, variable-rate loans start lower than fixed-rate loans. For example, according to a 2021 Credible survey, the average interest rate on a five-year variable-rate loan was 4.12%. And the average interest rate for borrowers taking out a 10-year fixed-rate loan was 5.72%.
That means you could pay back less with a variable interest rate if you pay your loan off quickly.
Variable rates fluctuate with the market, so your monthly payments can change over time. Thus, if you don’t pay your loan off fast and interest rates rise, you could end up paying more on your loan than if you’d opted for the fixed rate.
Fixed rates remain the same over the life of the loan, which promises stable monthly payments. But the rates start higher than they do on variable-rate loans, which may mean you pay back more than you would have at the variable rate.
Ultimately, which option is better for you may depend on your circumstances. For example, a borrower on a tight budget will probably do better with a fixed rate and a predictable payment. But someone with more disposable income might benefit from a variable-rate loan.
However, if the difference between your variable-rate and fixed-rate offers is small, the variable rate probably isn’t worth the risk. That’s especially true when student loan interest rates are at historic lows, such as the rates available during the coronavirus pandemic. In those cases, variable rates have nowhere to go but up. It’s better to lock in a low fixed rate than gamble that a variable rate will stay low.
Aside from interest, most loans come with other associated costs. These generally include loan application fees, origination fees, and late fees.
Most private lenders don’t charge application fees. It’s best to avoid any that do since there are plenty of excellent places to apply for free.
Additionally, most of the best private student loan lenders don’t charge origination fees. But you should always double-check, as it could substantially add to the cost of your loan.
An origination fee is a one-time, upfront administrative fee taken off the top when you receive the loan money. It’s typically a percentage of the loan amount.
For example, if you borrow $10,000 and your loan has a 4% origination fee, you’ll only receive $9,600. But you’re still on the hook for paying back the full $10,000, and interest accumulates on $10,000.
Unlike application and origination fees, nearly every loan comes with late payment fees. But it’s worth checking to see if one loan offers a lower penalty than another. You shouldn’t plan to make late payments, but it never hurts to have your bases covered.
One final note on fees: It’s illegal for any student loan lender to charge prepayment penalties, including private lenders. So you’ll be able to pay your loan off quickly without penalty if you can make extra payments.
3. Monthly Payment Amount
A common student loan mistake is failing to plan your post-graduation budget. The result is overborrowing, which leaves you unable to manage the loan payments.
To avoid this pitfall, plan ahead with a hypothetical after-graduation budget. Use a site like PayScale or Glassdoor to predict your first-year salary. Then account for typical expenses like rent, groceries, gas, a car payment, clothes, and entertainment.
Imagine what’s potentially left for student loans, and use that to gauge what you can afford to borrow.
Account for any other student loans you already have (or could have in the future if you still have several years of school ahead of you), including federal student loans. Use the loan simulator at Federal Student Aid to calculate those payments.
Different interest rates on private loan offers will result in different monthly payment amounts. Knowing what you can afford in your future budget can help you decide which offers work for you.
One word of caution: Although you can lower the monthly payment by extending your repayment term, doing so will increase the total cost of the loan, as more interest accumulates over a longer period.
4. Repayment Terms
Private lenders typically offer repayment terms of five, seven, eight, 10, 15, 20, and 25 years, although the options vary by lender. Repayment terms are the length of time you have to pay off the loan.
Though you can typically defer repayment until you graduate or leave school, the terms are set when you sign the loan agreement. So the only way to change the repayment term is to refinance the loan.
A shorter repayment term often means a lower interest rate offer because there’s less risk of the borrower defaulting. You also pay less interest overall because there’s less time for it to accumulate.
However, a short-term loan has a drawback. The monthly payments are significantly higher because there are fewer of them.
For example, a $10,000 loan at 5% interest paid back over five years is a $189 monthly payment. But if you take 15 years to repay the loan, the payment drops to $79 per month.
So if you go with a shorter repayment term, ensure the monthly payment is manageable.
But don’t make it longer than you need to. A longer repayment term means interest has longer to accrue (build up), meaning you’ll pay more for the loan overall.
For example, a $10,000 loan at 3% interest paid back over five years will cost around $800 in interest. But the same loan at 3% interest paid back over 15 years will cost almost $2,500 in interest. But in reality, the longer loan would likely have a higher interest rate, such as 5%, meaning it would cost over $4,200.
Thus, you need the right balance: a monthly payment you can afford that accumulates the least interest possible.
Use an online student loan interest calculator and run the numbers to see how different repayment terms affect the overall cost of your loan.
5. Total Final Cost
The total cost of your loan isn’t merely the amount you borrow. It’s every cost you pay that’s involved in the process of borrowing the loan, from origination fees to interest to prepayment penalties.
For example, let’s say you borrow $10,000 with a 4% origination fee, 5% interest, and a 20-year repayment term. The total cost isn’t $10,000. It’s $16,472.
It’s impossible to predict what fees and penalties you may pay in the future. But one way to compare the total cost of your loan offers is simply to calculate what each would cost based on their interest and repayment term and whether they have an origination fee.
Use a student loan calculator to run the numbers and compare.
6. Benefits & Discounts
Autopay discounts are the most common benefit offered by student loan lenders, including the federal government. Your lender gives you an interest rate reduction, typically 0.25%, for making automatic payments.
But it’s not the only rate discount or benefit to look out for. Plenty of lenders offer other perks that could make opting for their loan product worth your while.
For example, some lenders, such as Citizens Bank, offer loyalty discounts for opening other accounts, such as checking or savings accounts. Others, like Discover and Ascent, offer cash back for maintaining a certain grade point average or for graduating. And some, like Laurel Road, offer a discount for getting a job.
Though it has no effect on the cost of your loan, one prominent lender, SoFi, even offers free career coaching and financial counseling.
7. Deferment, Forbearance, & Discharge Options
Most private lenders offer options for deferment and forbearance, a temporary suspension of payments, but the terms and conditions can vary significantly by lender.
For example, only a few lenders offer deferment for financial hardship. And while some allow you to postpone payments for up to 36 months, other lenders only allow 12 months of deferment.
Moreover, most private lenders offer deferment and forbearance options as a single allotment. For example, if your lender only allows you to postpone your payments for 12 months total, and you defer your loan for 12 months during a period of economic hardship, you’ll have used up your allotment for the life of the loan, even if you go to grad school.
So check deferment and forbearance terms carefully, including the allowable reasons. Possible deferment or forbearance reasons include:
- Economic hardship
- Medical leave
- Return to school
- Military deployment
- Medical or dental residency
Additionally, many lenders offer discharge options. “Discharge” means you’re no longer required to pay off the loan, and they remove any adverse entries from your credit report. Discharge usually happens as the result of a negative life event.
For example, some companies offer the option for loan discharge due to the death of the borrower or the student on whose behalf the loan was borrowed (if a parent took out the loan). Without it, the lender can collect against the deceased’s estate or from the parent borrower, even if their child dies.
Though less common, some lenders also have the option for discharge in the case of total and permanent disability. But each lender establishes its own criteria.
8. In-School Repayment Options
Interest begins to accrue on your loan the moment you get the money. So, even though you typically don’t have to pay it while you’re in school, doing so can save you a significant amount in accumulated interest.
However, that’s not feasible for most students. So many private lenders offer several flexible repayment options during school.
These include making:
- Full payments
- Interest-only payments
- Low flat-rate payments (such as $25 per month)
- No payments until you graduate (or leave school) and the grace period ends
If you want the option to use one of these in-school payment plans, such as making flat-rate payments or interest-only payments, ensure the lender offers the option.
Note that some lenders who specialize in private loans for health professional students, such as Laurel Road, also offer the option to make low flat-rate payments during medical and dental residencies.
9. Co-Signer Release
To get the lowest rate possible on a private student loan, you may need a creditworthy co-signer. A co-signer is someone who applies for the loan alongside you. Although you take out the loan in your name, the co-signer guarantees it, meaning they agree to pay if you don’t.
Co-signers are especially important if you’re an undergrad with no credit history or a graduate student with a low credit score. Lenders use the co-signer’s credit to qualify you for the loan and interest rates.
However, that means a co-signer is equally responsible for the loan. So if you miss a payment or default, your co-signer will be on the hook.
The risks might make a co-signer hesitate to put their name on a loan, even if you can’t get one without it. But a co-signer release, which lets you take them off the loan after you make a specific number of on-time repayments, lets them rest easier knowing they only have to guarantee the loan temporarily.
Note that even among lenders that offer this option, the terms vary. For example, Sallie Mae allows borrowers to apply for co-signer release after they graduate and make 12 full on-time payments without having used a hardship forbearance during that time.
If you’re a parent or guardian looking into student loan options for a child, read our article on the risks of co-signing before agreeing to do it.
10. Customer Reviews
You’ll be working with your chosen lender for several years as you repay your student loan debt, so don’t overlook good customer service.
You may need to interact with the lender many times throughout the life of your loan, so it’s beneficial to look beyond interest rates to a company’s reputation.
As someone who’s been yelled at and harassed by one private student loan lender and treated kindly by another, I can tell you firsthand it matters.
To get a feel for how different lenders treat their borrowers, look for online reviews. You can find these by doing a general search for “[name of company] student loan reviews.”
There are two other places to check. The Better Business Bureau maintains a rating system for companies. Look for an A grade. You can also find a history of any complaints or government actions against the lender.
Similarly, the Consumer Financial Protection Bureau has an online complaint database where you can read consumer complaints against lenders. It also publishes reports detailing issues borrowers have had with lenders.
When you look at reviews, understand that all companies are likely to have some unhappy customers, even the best ones. And the larger the company, the more negative reviews they’re likely to have. But if there are far more happy customers than unhappy ones, and the company is scoring highly with the Better Business Bureau, you can probably rest soundly.
When evaluating offers, remember that the interest rate is only one factor that affects your monthly payments and the overall cost of your loan. So don’t stop there. You might choose a loan with a higher rate over a lower-rate loan if one or more other factors are more favorable.
Fortunately, there are ways to lower your private student loan interest rate later, including negotiating for a lower rate after you’ve shown a history of on-time payments.
And if you work on establishing or keeping good credit, you may even be able to refinance your student loan after you graduate. Private refinance loans typically have much lower interest rates than original private student loans. So the interest rate you get upfront isn’t necessarily the rate you’re stuck with for the life of the loan.