Despite student loan relief, do math carefully when borrowing

2013-08-11T00:00:00Z Despite student loan relief, do math carefully when borrowingSusan Tompor Detroit Free Press Arizona Daily Star
August 11, 2013 12:00 am  • 

More students are bound to be even more confused about their student loan options now.

For weeks, college students and their parents have fretted about new rate increases hitting some new federal loans on July 1.

But on Friday, President Obama signed a law that will lower the fixed student loan interest rate for undergraduates to 3.86 percent and graduate students to 5.4 percent. The good news is that these would be fixed rates for the life of the federal student loan. But rates for loans taken in future years could be more costly if interest rates overall head higher, as many expect.

Parents and students, as they start to shop for student loans this year, should first look to max out federal loan options because they have certain extra benefits, such as repayment flexibility. On the private loan side, students need to watch out for variable rates that are rock-bottom because they are likely to adjust upward over time, possibly doubling at some point. It might be smarter to lock in a fixed rate that is higher than variable- rate teaser offers.

And when calculating college expenses, parents and students need to factor in their credit scores, which could mean they don't even qualify for the lowest rate advertised.

Where do you turn if you're heading to college in the fall?

• Be extra careful about jumping at the first student loan rate you spot online at 2.25 percent or 3.25 percent. Many of the bargain-basement rates on private student loans are variable rates. So if interest rates climb higher in the next few years, as they likely will, you'd be stuck repaying that loan after graduation at a much higher rate.

"The variable rates have nowhere to go but up," said Mark Kantrowitz of Edvisors.com.

Consumers want to keep in mind that the equivalent fixed rate to a 2.25 percent variable rate student loan could be between 6 percent and 7 percent - assuming that rates climb higher over time and the borrower uses a 10-year or 15-year repayment term, Kantro-witz said.

So the cost of a 2.25 percent private variable loan is in the same ballpark as the federal loans, Kantrowitz said. But private loans typically do not offer all of the same repayment benefits as federal education loans. Research the options that your private loan may have for repayment plans.

Kantrowitz warned that a 5 percent variable rate, if you could get it, might hit 9 percent during a 10-year life of the loan. "You might be chasing after a low teaser rate, but ultimately it will cost you more."

• Second, could you even qualify for an ultra-low rate on a private student loan?

Many rock-bottom rates for private student loans are only available to those with excellent credit history.

Pay attention to the range of rates that are possible. Sallie Mae's Smart Option private student loan for undergraduate students has variable rates that could start at 2.25 percent but could range up to 10.125 percent, depending on one's credit score and other factors. Fixed-loan rates for that product range from 5.75 percent to 12.875 percent, again depending on the credit history of the borrower.

Patricia Christel, a spokeswoman for Sallie Mae, said students should track overall costs and build a plan on how they're going to pay for college, too. It is important to be able to complete a degree and not just focus on one year at a time when it comes to borrowing.

• Be sure to tap into federal student loans first.

Complete the Free Application for Federal Student Aid as part of the process to obtain a federal student loan. See www.fafsa.ed.gov

A student looking for a loan must be able to prove there's a financial need in order to qualify for a subsidized Stafford loan. About two-thirds of these loans are awarded to students with family adjusted gross income of less than $50,000. About one-fourth go to families with an AGI between $50,000 and $100,000, and less than 10 percent go to families with AGI's more than $100,000, according to FinAid.org.

Keep in mind that the government pays the interest on subsidized Stafford loans during the in-school period, effectively giving students and families a 0 percent interest rate during that time. Kantrowitz noted that's the equivalent of a 1-percentage-point to 2-percentage-point drop in the overall interest rate, assuming a 10-year repayment term.

MORE TIPS

• Many major banks either stopped offering student loans or only offer private student loans on a limited basis. Bank of America and Citi, for example, do not offer any student loans.

• Take extra care before agreeing to co-sign for a student loan. Having a co-signer can be beneficial to a student by possibly allowing him or her to obtain a very low rate. "But a co-signer is a co-borrower, equally obligated to repay the debt," warns Mark Kantrowitz of Edvisors.com. If the student defaults on the loan, the student will not only ruin his or her own credit, but also the co-signer's credit.

• Read the fine print and pay attention to various programs that could save you money. Sallie Mae, for example, offers lower interest rates on private student loans if students and their families opt to pay something while in school.

If the student pays $25 a month while in school, the rate is a half-percentage point lower. So a 5.5 percent loan rate could drop to 5 percent.

Source: Detroit Free Press research

Copyright 2014 Arizona Daily Star. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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