Updated on 09.12.14

Student Loans 101: What To Look For To Pay For College

Trent Hamm

I recently received this email from a reader:

I need some Buyer Beware advice on how to choose a lender for a student loan with a parent as co-signer. My 19 year old will be attending university and he has to take out 100% loans. The annual amount is a hefty 50K. When I review the lenders listed on the university’s recommended lender list, I do not have enough knowledge to know how to choose a lender. The interest rate is always variable on any student loan when it is in the student’s name and the parent a co-signer. But there is a lot of fine print attending each loan that I simply do not understand. Given what has happened with the sub-prime mortgages I feel that I might be stepping into a black hole with the student loans. The two categories of sub-prime mortgages and student loans appear to be very similar.

Obviously, it’s going to be impossible to describe every type of student loan in a single post, so instead I will offer some basic tips for evaluating student loan options. I went through this process myself not all that long ago and the scars are still fresh in my mind.

General Student Loan Categories

In the United States, student loans generally fall into these general categories:

Federal student loans to students
This group of loans include Perkins loans, Stafford loans, Federal Family Education Loans (FFELs), and Ford Direct loans. These loans are guaranteed by the federal government and are generally a very good deal. There are subsidized and unsubsidized versions (subsidized is better, as they’re basically interest-free while the student is in school) – the subsidized one has some pretty strict income requirements. The drawback is that they have a very low cap: $3,500 for incoming freshmen in 2007. In the past, rates on these loans have been very nice, but they are set to start approximating the rates on private loans starting later this year.

Federal student loans to parents
PLUS loans are federal government loans directly to parents for the purpose of paying for college. These are not loans that the student will repay – the parent is solely on the hook for them. Again, the rate used to be quite nice, but the rates are going up later this year.

Private loans
This is the meat and potatoes of it, the type of loan that most people will wind up having to take because other sources didn’t cover the cost of education. These are basically consumer loans from private lenders with no collateral, which often means that the rates are not particularly comfortable.

Six Tips For Comparing Student Loans

It is very difficult to offer concrete advice on which loan offers to take without looking at the options, but here are six tips that can help you separate the good from the bad.

Use the APR to compare the loans, not the “rate” The “rate” that many loans give out is not really very useful for comparison, because many loans with low rates have a ton of additional fees tacked on. The real tool for comparing the loans is the stated APR, which includes the various fees that they tack on. Remember, though, that APR isn’t perfect – it’s only an exact comparison tool for loans that have the same term. This, of course, means that you should…

Shop around thoroughly, regardless of the stated “rate” Many companies thus use a very low “rate” in order to attract your attention, then effectively do a bait and switch, giving you a loan with a very high APR and a low “rate” because of all the other stuff tacked on in the middle there. Thus, don’t toss out loan offers because they have a high rate – they may have low fees in other respects.

If you have difficulty with the APR and term math, ask what the monthly payment will be and multiply it out by the term For example, if you’re trying to compare a ten year and a twenty year loan, find out what the monthly payment will be for each and then multiply that payment by twelve, then by the number of years you’ll have the loan to see how much you’ll be paying total. Obviously, you want the smaller amount here.

Look at fixed-rate loans unless you think the Fed is going to significantly start dropping rates I’m not the right person to be giving long-term advice on where interest rates are headed. My suggestion is to talk to people in the finance industry (especially those you trust) and ask them whether they think the prime lending rate will be on average lower or higher over the next ten years. If they think higher or about the same, get a fixed-rate loan, otherwise get a variable-rate loan. I was luckily able to lock in some fixed rates in 2003 when loan rates were very, very cheap – I actually do better with my money in an HSBC Direct savings account than paying off my loans early.

High origination fees are usually a red flag If an origination fee for one loan is excessively high compared to the others, this may be a red flag, especially on a variable-rate loan, because the rate could skyrocket and the origination fee (tacked onto the overall balance) will really hurt you in the long run. Small differences aren’t usually that big of a deal, but if you’re looking at double or triple difference in origination fees, something’s afoot.

Check your credit report If the borrower or the cosigner have poor credit, the terms for the loan will likely be worse. Thus, one part of the process is to check the credit report of everyone who might be signing for the loan and then ensure that the people with the best credit do the signing.

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  1. amanda says:

    also some schools offer subsidized loans which have rates that are almost identical to federal student loan rates. generally these are private (read: expensive) colleges and universities, but for me, getting that kind of loan for part of my masters degree saved me A LOT of money!

  2. Elaine says:

    Lord have mercy, $50k a year? Send your kid to school in a different country.

  3. Beth says:

    It might be nice to ask (in a very non-judgemental way!) whether they’ve discussed what the repayment burden on $200,000 in student loans is going to be when this student is 23 (assuming it’s 50k per year for 4 years). Are there any alternative options to a school that is going to incur $50k worth of debt per year attended?

    If this parent co-signs then he or she will be on the hook for repayment if the student can’t hack it, is that correct?

  4. William says:

    Find a way to send your kid to school in Canada. It’s not all that far away…

    Plus, he / she can’t get drafted.

  5. Josh says:

    Good GOD! 50K a year with no scholarships?? Is there any education worth that debt? I think the fact that they are getting absolutely no financial aid might be a sign that they aren’t exactly what that school is looking for. Chances are, the kid won’t be successful there. Pick a different school.

  6. Josh says:

    William, I think the only draft they have to worry about is the one in your head!

  7. Erin says:

    If the new – much higher – interest rates for Federal loans concern you, write to your congressperson. These rates were pushed through by the banks during the last term of congress. The new congress is always trying to push through legislation to halve that interest rate.

    Also, I’d strongly urge you to consider community college for the first two years if you must take out a 100% loan for all four years. Although a lot of people get stuck in community college, determined students can take of their requirements for far less, while also working part-time and saving money up for the eventual transfer. Transfer acceptance rates are very high if you kee p your grades up and make sure you take the classes that are required for first and second-year students at your target school.

    Trust me on this one, my husband financed his entire undergraduate and graduate education and we’re now $250K in the hole (with my smaller graduate debt included). Meanwhile, I went to community college for two years and received exactly the same education for FAR less money.

  8. William says:

    I will rely on my social medicare to fix the draft in my head.

  9. Elaine says:

    William – yeah, that’s what I was getting at.

    Two years ago I graduated from THE most expensive undergrad school in Canada (hey, they had the program I wanted!). Total cost for my top-of-the-money-heap BA was $80k Canadian – about $72k US right now, but the dollar was lower then. That includes living in residence, meal plans, everything. I’m fairly sure all the public universities are between $6-10k a year in contrast. hmm…. a four year degree for $25k, or ONE SEMESTER?

  10. kim says:

    I know that this sounds harsh, but I plan to require my kids to take their first year of classes at the local college and work for a year or two before going off to school. Living at home will really save on expenses and I want them to have some direction before going to school.

  11. Josh says:

    “I will rely on my social medicare to fix the draft in my head.”


  12. MossySF says:

    200K – ouch. If you’re not going to be a doctor or lawyer, it’s pretty damn hard to repay this kind of money. Let’s put this in perspective — this is what you would typically pay for a house in many parts of the country. I’d expect to not be able to buy a house for 30 years because buying a house ontop of this loan is the equivalent of carrying 2 mortgages.

  13. imelda72 says:

    The reader’s son probably has no real idea just how serious $200K debt will be. I’m about to graduate and start repaying my own loans, and I regret following my parents’ advice to take out as much in loans as possible, to avoid having to pay now. I didn’t realize how hefty the payments would be–and I only borrowed $30K. I can’t imagine being $200K in the whole right now.

    But I also wanted to point out one thing to the reader–be wary of the school’s “recommended lender” list. It probably has nothing to do with your best interests. I’m not saying those lenders are bad, but colleges have been getting into a lot of trouble lately for recommending lenders that offer them kickbacks. It might be worthwhile to do some external research, too.

  14. briana says:

    I did a two-year community college diploma program here in Canada. If I remember correctly, the entire thing cost me less than $6,000, and today I make more than most of my friends who did four years of university. Tuition is calculated by the number of credits, so if a BA was what I was after, I could have done my first two years for about the same cost, then transfered to university for two years. I am not 100% certain, but I believe community college here is about half the cost of university, and the system is set up for a smooth transfer of your university-equivalent courses, so long as your GPA is up to par.

    Today, of course, tuition is higher, but it’s still far cheaper to start at a two-year college. When you get your university degree, there’s nothing to distinguish your accreditation (in terminology or external prestige) from a student who spent significantly more and attended all four (or more) years at university. Now some colleges are even offering BA programs in partnership with universities, so you can do all four years in selected programs in your hometown at a reduced tuition rate, and still have university accreditation (the instructors and curriculum are university-level, but the teaching happens on the college campus).

    My point is that although post-secondary education is important for both personal growth and earning power, don’t assume you ‘need’ to spend the world to get it, especially if you can’t afford it. I had many friends who did four-year university degrees, discovered they hated the profession they trained for, and ended up saddled with thousands in student loans and working a job in retail.

    It’s not about how much you spend on your education, and if you don’t need to spend $50,000/year to do what you love, why would you? Education is important, but the value you get from it doesn’t always correlate with the price.

  15. Frank says:

    Depending on interest rates, you can expect repayment rates around $2,000 a month on that size of a loan. If this is not a financial burden for your family, then go for it, but very few entry level jobs will pay enough to make that a reasonable cost.

    I think Trent had mentioned some time ago that student loan type debt should be about 8% of your income.

  16. Mitch says:

    It’s May, so if I’m guessing right you probably just got the acceptance last month, sent in your deposit, and are now finally getting the financial aid paperwork.

    I agree with a lot of people here that 200K is a lot of debt for a 19-year-old to sign up for. For health professions, maybe maybe maybe, but not for undergrad. Unfortunately, you probably didn’t know this when he accepted an offer. So the first thing you must do is see if the financial aid office can do anything with your package. Did you fill out the FAFSA and Profile? (Profile is similar to FAFSA but non-government based; many private schools require it.) Is there anything that the formulas would have missed? (e.g. other drains on the support, such as disabled family members)

    If this line of inquiry doesn’t turn up anything, then you may want to re-examine your options, as other posters have mentioned. It may be worthwhile in the long run to abandon a deposit, but if your son has a specific needs or dreams, such as certain academic programs or services, community colleges may not help him, either. Remember that if you co-sign, you have to be able to plan on paying the loan yourself; depending on your financial planning, that may take some discussion. Insert family communication here! You have to walk the line here treating him as an apprentice adult rather than a child.

    If you’ve done all that, and his resources are sufficiently high that he is ineligible for government aid (including subsidized loans), then yes, what will be left is private loans. In this case, you may not have to go through the school–from what I understand, it is basically a personal loan with a little better rate because it’s for education. Check with your own bank or credit union first, then try searching at Bankrate. Imelda is correct that some things have hit the fan recently.

    If you haven’t worked with the college process for some time, ask friends who have done it in the past five years (for themselves or for their children) and see if they have advice. High school counselors are overworked (at my high school, each one handled about 300 students) and although they are sincerely helpful (mine came across town to my house to help sift through two boxes of colleges’ mailings) they may not always be able to stay up to date on everything. I know that a lot has changed even since I started undergrad in 1998, such as the new tax credits! Remember the other things like keeping your eyes open for small scholarships and so on–they will reduce your loans and interest later on.

  17. Ted Valentine says:

    Borrowing $200k for an undergraduate degree is foolish. You are borrowing and living well beyond your means. This poor kid will be a slave to the banks for decades! Time to step back and think about things.

  18. Matt Smith says:

    What is your annual income?
    Did you fill out your FAFSA?
    What is your EFC (Estimated Family Contribution determined by your income and assets)
    The reason why I ask is that the federal government requires that the school make up the cost of attendance up the the EFC. If you guys make 200K a year it looks like loan time. Have you recieved your award package from the school, this usually details exactly what is required to pay. I have a student going to Brown and the tuition is only 45K, and the school is making up all the money except for 6500 in goverment loans and 2500 EFC. Look into this.

  19. Matt Smith says:

    Btw, I am a highschool admissions counselor. Think carefully about the personality and work ethic of your child. Definitly do NOT let he or she go if they will drop out after a year. If it is in fact 50k, the juice will start the moment the student drops below a full time student. Thats approx. 450$ bucks a month minimum with no college education.

    College is often a time for kids to grow and make mistakes. That sort of debt is a liability for anyone who is unwilling to take university study seriously.

  20. Kumar says:

    Can you clarify what exactly your son will be studying and what school is this? It’s not worth it to rack up $200,000 in student loan debt, this means the son will be a slave of the banks for the rest of his life!

    Also say when the son finishes school and wants to settle down, buy a car, a house, when lenders see his $200k debt, i doubt they will offer him anything without a huge security deposit or down payment (atleast $100,000).

    And yes just like Matt Smith says, $50k/year in student loan debt is for someone who really knows what he wants to do in life… Most 1st year students change their minds after their 1st year…. “ooh i don’t really like Computers so i’m gonna switch to Marketing.”

    Abdul @ Debt Consolidation Community http://www.3debtconsolidation.com

  21. reulte says:

    Great Ceaser’s Ghost doing the Chachacha!!!!

    Stop! $200K? What are you thinking?

    Put down the pen. Back away slowly, then turn and run for your (financial) life.

    First of all — does your 19 year old REALLY want to go to college and knows exactly where they want to be in $200K… I mean in 4 years? If your child can honestly state and has been stating ever since s/he could speak that they are going to be a doctor/vet/accountant/whatever then start again slowly. If not, put your kid in the military or at a minimum wage job or volunteering to find out what they would like to do with the rest of their lives. Make them responsible for a portion of their costs of the household. Give them $1000 and kick them out to manage on their own.

    Second — find out what courses can be CLEPped. I CLEPped (tested out of) an entire semester of introductory courses including Biology 1, History 1, English 1 and 2, and – to my amazement – Spanish. If your 19-year old can’t CLEP anything then they shouldn’t be going to college (at least at the moment). There is a charge for the tests, but it is certainly cheaper than 1/5 of a $45K semester.

    Third — As earlier suggested, community college is much less expensive and you learn exactly the same things as the first two years at university (assuming you haven’t CLEPped them).

    Fourth — Try a less expensive school. Trust me, I never ask my MD or orthodontist where they matriculated. When was the last time you were impressed with someone ONLY because they went to Prestigious U?

    Fifth — Have them look for a job with training potential. I seem to recall a book called something like ‘The 100 Best Companies to Work For’ which had several companies with liberal education plans for their employees.

  22. Green Panda says:

    I definitely regret the student loans I have. I went to community college my first two years and didn’t have to pay. My last two years cost me, though, and to be honest quality of education did not justify the jump in cost per credit hour. Many of my professors in community college taught at the university. Same quality, $50/credit hour vs $200/credit hour.

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