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CHOOSING A STAFFORD LOAN LENDER
Understand the players:
- Lender: The bank, credit union, or financial institution that you choose to borrow your student loan funds from.
- Guarantor: The agency that guarantees your loan against default. If the borrower defaults, dies, or becomes totally and permanently disabled, the guarantee agency reimburses the lender for the balance remaining on the loan.
- Servicer: Agency that the lender contracts out to help ‘manage’ your loan. This is usually done at repayment. The servicer is responsible for collecting repayment, handling deferment requests, and keeping apprised of changes in address, name, etc.
Understand the charges:
- Default Fee: This administrative fee is mandatory and is typically 1% of the loan amount and is paid to the guarantor for insuring your loan. This fee is deducted from the loan by the lender before it is disbursed to the school.
- Origination Fee: This fee is 2% of the loan amount and is deducted from the loan by the lender before it is disbursed to the school.
- Unsubsidized Interest: Interest on an Unsubsidized Stafford Loan begins to accrue as soon as the loan is disbursed to the school. The current interest rate is fixed at 6.8%. You have the option to pay this interest while you’re in school. If you elect not to do so, the interest will accumulate and will be added to the principal.
- Repayment Interest: Once your loans enter repayment status, your lender will calculate a repayment schedule over a 10-year term that will allow you to repay the total amount of loans you borrowed plus 6.8% interest.
Understand lender incentives:
- Loan Fees: Most lenders no longer charge origination fees, and in some cases absorb the default fee as well, however there are some that do still charge the origination fee. By not charging an origination fee, you will receive more money up front-but you will not save any money while in repayment.
- Principal Reductions: Some lenders will refund a percentage of your outstanding student loan balance either at the start of repayment or at the designated milestones of repayment, such as 36 months or 48 months. Therefore, you may save money while in repayment but will receive less money up front.
- Interest Rate Reductions for Repayment: Some lenders will reduce the 6.8% interest rate at the start of repayment or at designated milestones of on-time repayment, such as 36 months or 48 months.
- Interest Rate reductions for using Automatic Payments: Some lenders will reduce the interest rate if you elect to repay your loan through pre-scheduled automatic bank debits. Although the reduction in interest rate varies, the reduction is typically 0.25%.
Understand the fine print:
In most cases, the ability to cancel loan payments and /or reduce interest accrual or principal requires that you make all of your payments on time. Student may lose advertised benefits if they miss payment deadlines.
Some lenders sell their loans to secondary markets, meaning that you will make payments to a new ‘owner’ of your loan. Sometimes, loans are sold to more than one secondary market, which could leave you with payments each month to more than one loan ‘owner’ Sending separate loan payments to multiple loan holders can be expensive and confusing.
In addition to selling loans, some lenders contract out servicing (keeping up with your changes of address, sending you bills, receiving your payments, processing your deferment requests, answering questions, etc.) to a third party contractor.
Consider more than just cost:
When making a large purchase, you don’t automatically buy the least expensive item. You shop around until you find a good product for a reasonable price. Similarly, you should ‘shop’ lenders until you find one who can disburse your loan funds to your school efficiently and accurately at a reasonable cost. Lenders should always be available and able to answer your loan related questions and concerns. Remember, your loans have to be repaid, so you want to select a lender who is accessible and easy to work with.
Do your research:
Lenders often advertise that they have the best loan product available. While this may be true, they may not be the right lender for you. To help you decide, use the following checklist:
- Dedicate some time to calling or e-mailing lenders.
- Ask them the following questions:
- Do you charge loan fees?
- What are your repayment benefits?
- What do I have to do to receive these benefits and how are the benefits lost?
- If I borrow $10,000 over my college career and I receive all these benefits, what will be the total dollar amount I will repay by the end of my 10 year repayment?
- If I borrow $10,000 over my college career and I receive NONE of these benefits, what will be the total dollar amount I will repay at the end of my 10 year repayment?
- Compare the cost of your loan, the service you received, and any other advantages to using each lender you contacted.
Remember the final choice is up to you. Only borrow what you need, research the best option for you, and do not forget that this is money that needs to be repaid.
A comparative list of over 50 Stafford Loan lenders is available at: www.finaid.org/loans/educationlenders.phtml
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