How to Compare Student Loans

Do college costs have you down? You’re not alone. On average, only 43% of 2018-2019 college costs were covered by family income and savings. 

To bridge the gap, many students look for additional financing. One common option is student loans.

Student loans can be a great way for students to invest in their education. But it’s important to remember that they are, in fact, loans. The money will need to be paid back (with interest)  — so students should choose wisely. 

How can students find the best loan to meet their needs? Here are nine of the most important factors to consider when deciding. 

No. 1: Lending source

There are two main lending sources for student loans: federal and private. 

Federal loans

Federal student loans are products of the federal government. These include:

• Direct subsidized loans
• Direct unsubsidized loans
• Direct PLUS loans (for graduate and professional students)
• Direct PLUS loans (for parents). 

Federal student loans include terms and conditions set by the law. Typically, federal loans provide the best loan option for students, due to their fixed interest rates and borrower protections. 

When a student applies to college and fills out the FAFSA, federal loans are automatically included as part of their financial aid package. Unfortunately, federal student loans have annual borrowing limits and may not cover all of a student’s expenses. That’s where private loans come in. 

Private loans

Private student loans include a wide variety of different lending sources, such as a university, company, nonprofit, or individual donor. Each private student loan comes with its own unique set of terms and conditions. Students can search for and apply to private student loans at any time during their education. 

When comparing private loans, it’s important to take into consideration the reputation of the lending company. How long have they been in existence? Are they well-known and trusted? Check the Better Business Bureau (BBB) to view a company’s grade and read customer reviews.

It’s wise to shop around for the best student loan – whether it comes from the government or a private lender. By researching different lenders and comparing multiple offers, borrowers can ensure they find the best terms and conditions to meet their needs.

Need more information on the ins and outs of financial aid? Check out our comprehensive guide here on how financial aid works.

No. 2: Chance of approval 

Before shopping around for the best deal, find a student loan company that will approve you for a loan in the first place. Research the eligibility requirements and make sure that you’re a fit. 

Are there credit requirements?

There are several federal student loans that don’t require a credit check for students to qualify. PLUS loans, however, do require a credit check before determining eligibility.

To qualify for a private student loan, borrowers must meet the lender’s credit and income requirements. This may be difficult for a young student without a solid credit history. Often there’s an option to add a co-signer, such as a parent or guardian, who may have a longer credit history and a higher credit score.

Are you pre-approved?

If so, submit a pre-application form to compare a few key loan metrics without being locked in to an offer. All you need to provide is a name and some basic financial information, and the lender will supply an instant rate quote. 

Don’t worry, you’re not required to accept the offer, but it’s a convenient way to check your eligibility and compare metrics at various lenders before making a decision. 

Just make sure that these pre-approvals aren’t performing a hard credit check, so that your report isn’t dinged due to multiple inquiries. 

No. 3: Interest rates

Arguably, the most important factor in choosing a student loan is finding the best interest rate.

What’s an interest rate?

An interest rate is the amount of interest due on the amount borrowed -- it’s typically a fee that equals a percentage of the loan balance. Basically, it determines how much money a borrower will spend during the life of the loan.

Each lender sets its own rates, often prescribing higher rates to borrowers that it considers risky and lower rates to creditworthy borrowers. The lower the interest rate, the less a borrower will have to pay back throughout the course of the loan.

Federal student loans have fixed interest rates, meaning that every borrower has the same rate. PLUS loans have fixed interest rates, but these may not necessarily be lower than comparable private loan rates. Private student loans can have fixed or variable interest rates, meaning they might be the same or different for each borrower. These are often higher than the rates on federal student loans, but it does depend on a borrower’s specific circumstances. 

How do you compare interest rates? 

To compare the interest rate for private student loans, fill out a pre-application and see what different lending companies will offer based on submitting preliminary financial information.

Bonus tip: Look for interest rate discounts to save money. Search for special rate cuts, such as discounts for enrolling in autopay or syncing a bank account. If this information isn’t readily available online, then call a lender’s customer service line and ask.

No. 4: Fees

Just as private lenders set interest rates, they also set their own fee structures. Private lenders may charge an application fee, origination fee, or service fee.

A loan application fee is the cost to submit an application before it receives approval. Typically, a pre-application is free.

An origination fee covers administrative costs. This fee is often added to a borrower’s loan balance after each disbursement.

Service fees are just one way in which lenders cover associated costs with underwriting or processing a loan.

Not all lenders charge fees, but for those that do, you will need to factor this expense into the total cost of the loan. As you compare student loans, search for transparent and reasonable fees.

No. 5: Grace period

A student loan grace period is a stretch of time that allows borrowers to become financially settled before repaying their loans. The grace period begins after a borrower has either graduated, left school, or dropped below part-time enrollment status.

Most federal student loans have a grace period that lasts six months. Private lenders aren’t required to offer a grace period, but some choose to offer them with varying lengths.

Take caution: During a grace period, interest will continue to accrue, so the total amount of money owed on the loan will also increase. If possible, it’s wise for students to start paying off student loans despite the grace period.

No. 6: Monthly payments

A monthly payment is the amount a borrower must pay back each month until the student loan is paid off. The amount of the monthly payment depends on a variety of factors, including:

• Interest rate
• Frequency of payments
• Length of repayment
• Total loan balance

Borrowers need to sort through interest rates, term-length, fees, and other conditions to determine how much the monthly payment amount will be. This is difficult to do on one’s own when a student doesn’t have a benchmark of the average payment amount. 

Use a student loan calculator to estimate an expected monthly payment amount by plugging in a few key metrics.

No. 7: Repayment options

Once a borrower is ready to start paying off their student loans, the right repayment option is crucial. A repayment option is the way in which a borrower will repay their loans, affecting the amount due each month.

Not all loans have the same repayment options, so be sure to check which ones are provided before accepting the loan and its terms.

Federal student loans tend to have better repayment options than private loans. They often include income-driven repayment, which takes into consideration a borrower’s current financial situation. This kind of flexibility can be a lifesaver to borrowers struggling to meet payments. 

A short-term repayment plan has higher monthly payments. A long-term repayment plan may have lower monthly payments, but the borrower will be in debt for longer, spending more interest in the long run. 

Ultimately, it’s important to balance saving money on interest with affordable monthly payments. Consider what works for your budget before choosing a loan term and subsequent repayment option.

No. 8: Customer service

Again, it’s not a bad idea to check the Better Business Bureau (BBB) to read reviews about lending companies with the intention of learning more about their customer service. Ask yourself if there are any red flags that arise during your research.

Responsive, helpful, and transparent customer service representatives can make a huge difference in one’s overall lending experience.

No. 9: Loan cost

College graduates are entering the workforce with a burdensome amount of student loan debt. The best tip to avoid being a debt-riddled statistic is to not take on more student loan debt than you can reasonably and comfortably expect to pay back.  

Before accepting a student loan, judge the total loan cost. Interest, fees, monthly payments, and term-length all affect the overall cost of the loan.

Also be sure to consider salary projections based on your chosen major or career path, and compare that number to the total loan cost. Use a student loan debt-to-salary calculator if you want to dig in and crunch the numbers.

Worried about debt? There are a few tricks to help reduce overall loan cost. 

• A shorter repayment period can reduce the overall cost of the loan, but this will result in higher monthly payments. 
• When possible, pay more than the minimum monthly payment to reduce the amount of interest you accrue and the overall cost of the loan.
• Look into other financial options, such as grants and scholarships, to lessen the debt burden.

Do This Before Accepting a Student Loan

Before selecting a student loan offer, borrowers need to do their homework, says Robert Farrington, the creator of The College Investor. Research helps a borrower make an educated decision before taking on student loan debt.

“Start with the most important step: Compare loan rates,” Farrington says, who suggests using a website to compare rates from multiple lenders. This will produce a snapshot, making it obvious which deal is the best.

“Once you have a handful of potential lenders in mind, look at the terms, fine print, and other aspects of the loan,” he says. This will help borrowers make the best student loan decision to fit their needs.

Bottom Line

College costs are rising, but there are several financial options available to students that make it more affordable. Student loans are one option, but it’s critical for borrowers to compare a few key metrics before accepting an offer so that they are set up for future success, academically and financially. 

Robert Farrington is the founder of The College Investor, which he started to help millennials get free of their student loan debt. While in college and graduate school, he realized that most people were oblivious to investing and personal finance. It was apparent the number one dilemma holding millennials back is student loan debt. This led him to write, “Student Loan Debt: Getting in Smart, Getting out Painlessly.”