When it comes to a college student loan, you have two ways to go. You can go to the federal government or to private lenders. Just for the record, my preference is for you to graduate from college with no education debt, but sometimes that’s unavoidable.
The federal government offers loans that are relatively easy to get and don’t cost too much. Also, the fees associated with these loans are low. The financial aid forms are a pain, but you’ll survive.
For example, with a Stafford loan, students don’t need a credit history, collateral or even a co-signer. So far…so good.
You ask about the rate? They are fixed. Currently it’s at 6.8% and if you can prove financial hardship, you might be able to get a lower rate (4.5% as of this month).
With a private loan, you might pay even less than 4.5%, but the rates are variable.
That means you’ll probably pay much more interest over the years. (Sure rates are low now because the economy is floundering. But if it takes you 10 or more years to repay those loans, do you really want to bet on this low-rate environment continuing? I don’t.
Usually, private loans require a parent to co-sign. The better the credit history, the lower the rate. Conversely, the lower the credit score, the higher the rate. If your history is really troubled, your rate may be as high as 11 or 12%. Ouch.
So how do you decide which way to go?
Ask yourself two questions:
1. Do you really need a loan for college?
Maybe the first question is, do you really need to go to college now? For some people college is just a waste of time and money.
I read somewhere that only one in four college graduates are finding jobs right now. Hopefully things will improve by the time you graduate, but what if they don’t? Are you willing to end college deep in debt and possibly unemployed?
My feeling is if you want to work as a professional, go to college. But does it have to be Harvard?
If you’re in a situation where you’re going to an inexpensive school and still need to borrow the money to do it, I can support that. But if you can get that degree at a fraction of the cost by going to a different school, you must consider doing so.
If, on the other hand, you think you’d prefer to work in the trades, you may do better by skipping college at this time and getting into trade school now.
2. How long will you need the loan?
If you decide you’re going to borrow to finance your education and you’ve done everything you can to minimize those loans, try to determine how long you’ll need the loan for.
Estimate what you’ll earn when you graduate and what it’ll cost you to live. Then you’ll know how fast you can repay those loans. Hopefully, it will be fast.
As a rule of thumb, if you can repay those loans within three years of graduation, I’d go for the variable rate. If it will take you five years, I’d go with the fixed rate. If it’ll take you more than five years to repay the loans, it might be a sign that you‘re barking up the wrong tree and should reevaluate your decision.