Getting a college education isn’t an easy task. Studying on a regular basis is necessary in order to get good grades. Add to that the pressure of knowing you’ll have a huge loan to pay off after you graduate and you have the perfect recipe for stress. You can’t do much about the studying part except do the best you can, but as far as loans go, there are ways to keep the amount you’ll owe at a minimum. Following are a few tips on how to get a good rate on a student loan.
Types of Loans
Basically there are two types of student loans–federal and private. A federal loan is money lent by the federal government to individuals so they can get a higher education. A private loan may or may not have been designated specifically for your college education, but it must still be repaid. Loans that come through the federal government come in two forms–subsidized and unsubsidized–and are arranged through the college’s financial aid department.
Private student loans can come from a variety of places, but usually come directly from a private lending institution, such as a bank or credit union. Most people agree that a federal student loan is cheaper in the long run, but shopping around for cheap interest rates through a private lender never hurts. Federal student loans have a locked-in interest rate that may vary from year to year, but are capped at 8.25%, while private loan interest rates can be significantly more than that.
One of the best ways of getting a good rate on student loans is to simplify the repayment process. If you have a number of loans, you can try to consolidate them, possibly at lower interest rates. Doing this could reduce your overall interest rates, but there’s no guarantee. Before you sign any papers, make sure the consolidation will be to your benefit. Federal loan interest rates are usually lower, but if you do a little searching you may be able to find a private lender that will combine your loans at a cheaper rate.
Refinancing a Federal Student Loan
Refinancing in order to reduce your payments is the goal of a consolidation loan. If you have more than one federal student loan and are considering consolidating them, there is a way to do it. Go online to the U.S. Department of Education website at http://www.direct.ed.gov/ and read about their Federal Direct Loan Consolidation Program.
Refinancing a Private Student Loan
Private loan consolidation is somewhat different. You can approach your lending institution with the idea of consolidating your loans in order to get reduced interest rates, the decision on whether or not to combine your student loans is totally up to the discretion of the individual lending institution, as is the rate of interest if they do decide to combine your loans. In many cases the rate of interest will be higher than a federal student loan. At times it will be much higher.
Private institutions rely heavily on credit scores when they give a loan, and a consolidation loan is no different. If your credit score has improved since you initially took out the loans, it will be increase your chances of getting a better interest rate. However, you may have to pay a fee because the new loan is considered just that, a new loan. The interest rates on a private loan may be adjustable, or fixed, and there is no cap as there is with a federal loan. The bottom line is that with a private loan you are susceptible to all the rules and regulations that apply to any borrower, so having a good credit rating is imperative.
Combining Federal and Private Student Loans
While it is possible to combine all your loans, both federal and private, into a single private consolidation loan, it is not recommended. You cannot combine private loans into a federal loan consolidation, so the only way to do it is to borrow the money you owe on federal loans from a private lender and then pay off the federal loans immediately. Once that’s done, you will have to borrow that amount, plus the amount of your private loans, and combine them into a new private loan. There is no guarantee your overall total payment would be significantly reduced. In fact, the interest rates could even be higher than you were paying for your federal loans.