Getting through college is difficult enough without having to stress over how to pay for it all. With the average cost of tuition, room and board, books, and other expenses totaling $28,775 at private non-profit four-year colleges for the 2022-2023 school year, student loans are a necessity for most students. But with so many options, how do you know which bank to choose for your student loans?
This comprehensive guide will walk you through everything you need to know to choose the right student loan and lender for your unique needs and financial situation as a college student. We'll cover the pros and cons of federal vs. private student loans, how student loan interest rates work, the best banks and lenders to consider, insider tips for the application process, and expert advice on managing your loans after graduation. Let's get started!
Federal vs. Private Student Loans: Which is Better?
The first big decision when taking out student loans is whether you want to go with federal or private loans. Here's a quick rundown of how they compare:
Federal Student Loans
Direct federal student loans offered by the U.S. Department of Education tend to have lower interest rates, more flexible repayment options, and better protections if you hit hard times. For example, you may qualify to temporarily postpone payments if you lose your job or have other financial hardships through deferment or forbearance. Federal loans also offer income-driven repayment plans, forgiveness programs for teachers and nurses, and loan discharge if you become permanently disabled.
On the downside, federal student loan amounts are capped each year, so they may not fully cover your tuition and expenses. They also require more paperwork and can take longer to be approved.
Private Student Loans
Private student loans offered by banks, credit unions, and online lenders can help fill gaps if federal loans don't cover your full tuition. They typically have higher approval amounts and faster application processes. However, they usually have stricter eligibility requirements regarding your credit history and debt-to-income ratio. Private loans also tend to have higher interest rates and lack the protections and flexibility of federal loans.
For most students, federal student loans should be your first choice whenever possible due to the lower rates and stronger consumer safeguards. But turning to private lenders for additional funding may be necessary.
Comparing Interest Rates on Student Loans
Interest rates vary widely based on the type of loan, your financial history, and current market rates. Here's what to expect:
Federal student loan rates range from 4.99% to 7.54% for undergraduate students for the 2022-2023 year. Federal PLUS Loans for parents and graduate students range from 6.28% to 7.54%.
Private student loan rates currently average around 5% to 13% APR depending on your credit score. Excellent credit (720+ score) can qualify you for rates starting as low as 2% to 5% fixed. Poor credit scores can drive rates up to 13% or higher.
Variable rate loans may start lower but could increase over time as market rates change. Fixed rate loans lock in your rate for the life of the loan, giving more long-term predictability.
Always shop around and compare rates between multiple lenders. Even a small difference of 1% in your interest rate can add up to thousands of dollars over a 10-15 year repayment term.
The Top 5 Best Banks for Student Loans
Now let's review the top banks and lenders to consider for both federal and private student loans as a college student.
For Federal Student Loans
College Ave offers a simple online application process and quick loan funding. They provide both federal and private loan options.
Sallie Mae is one of the largest federal student loan lenders and offers competitive rates along with useful tools to teach financial literacy.
Ascent focuses specifically on providing student loans, so their staff has specialized expertise.
For Private Student Loans
Earnest considers career potential and earning power along with credit scores during approval. Their rates start as low as 2.4% APR.
SoFi offers no origination fees or prepayment penalties. Unique perks include career coaching and discounted student loan refinancing.
College Ave boasts excellent customer service scores and offers 0.25% autopay discounts on their already competitive rates.
Be sure to compare rates across multiple lenders, as offers can vary widely. Applying with a creditworthy cosigner may also help you secure better loan terms.
Expert Tips for Applying for Student Loans
Follow this inside guidance to avoid hurdles during the student loan application process:
Apply early - Don't wait until right before tuition is due. Processing times for approval can take 1-2 months.
Complete the FAFSA - This is required for federal loans and many lenders offer discounts for submitting your Free Application for Federal Student Aid info.
Check eligibility requirements - Know what credit scores, income levels, and other criteria lenders use to qualify applicants.
Provide all required documents - This may include tax returns, pay stubs, transcripts, and cosigner details if needed. Missing paperwork delays approval.
Compare total costs - Look beyond just interest rates and consider origination fees and other costs lenders charge.
Watch out for variables - Ask whether rates are fixed or variable, when repayment begins, and if there are discounts for auto-pay or other opportunities to save.
Designate loan funds properly - Be sure to assign loan amounts only for authorized education expenses to avoid problems.
Following these tips can simplify the process and help you secure the ideal student loans for your needs.
Strategies for Managing Student Loans After Graduation
Once you graduate, you'll need to start making payments on your student loans. Here are some smart strategies for managing this debt:
Take advantage of the 6-month grace period before payments are due. Use this transition time to find a job and get financially settled for repayment.
Understand all of your repayment options beyond standard 10-year plans. Income-driven and extended plans as long as 25 years are available to reduce monthly costs.
Consolidate or refinance loans with a private lender to potentially qualify for lower interest rates. Just be sure you don't lose key federal protections by refinancing federal loans.
Find out if your employer offers student loan repayment assistance as part of your employee benefits package. This is becoming a popular workplace perk.
Get on an automatic payment schedule for the lowest payment amounts each month. Even a 0.25% discount for autopay adds up over years of payments.
Dedicate any extra funds from tax refunds, gifts, bonuses, or raises specifically toward knocking down principal loan balances.
The bank you choose for student loans can save you thousands of dollars over the life of your loan through competitive interest rates and flexible repayment terms. Follow this guide and you'll find the best student loans for your money and long-term financial wellness.
Frequently Asked Questions
What is the average amount of student loan debt? For the class of 2021, the average student loan debt for bachelor's degree graduates was $28,400, according to EducationData.org. However, debt loads vary widely by factors like degree types, attendance at public vs. private colleges, and whether students live on campus.
Should I apply for federal or private student loans? Experts recommend prioritizing federal student loans first whenever possible because they offer lower fixed interest rates, income-driven repayment options, and better protections. Private student loans can help cover any gaps in college costs but may have higher variable rates and less flexibility.
When should I apply for student loans? Submit your applications as early as possible, ideally 3-5 months before you need to pay tuition. This gives you plenty of time to compare multiple lenders, submit all documentation, and address any issues if loans aren't approved quickly. Don't wait until right before the next semester starts.
What happens if I can't repay my student loans? Contact your lenders immediately if you are struggling to make payments. They can discuss options like income-driven repayment plans, deferments, and forbearances. Defaulting on student loans damages your credit score and can result in collections, fees, wage garnishment, and ineligibility for additional aid.