Are you looking to borrow a Private or Alternative Education Loan? Here are a few tips and things you might want to think about before doing so!
Tip 1: Understand Interest (and the Terms):
Before you set out to search for a private loan, be sure that you understand the term “interest” and how it works. Interest is the percentage that a company charges for you to borrow their loan. Interest will accrue on the principle, aka the amount of the loan that you borrow up until you pay it off. In the end, you will end up paying back the amount that you borrowed plus all of the interest that has accrued over time. The higher the interest rate, the more you will pay back over time. And the more you borrow, the more interest you’ll accrue and end up paying because interest is a percentage of the amount that you borrow.
Note: The amount of time it takes you to pay the loan back also plays a factor in how much you will end up repaying. Someone who takes 10 years to pay their loan back with a higher interest rate could possibly pay less than someone with a lower rate who pays their loan back in 30 years.
The best thing to do is to use an interest calculator to determine how much you will end up paying on a loan in total. For example, taking out an $11,000 loan with a 9.99% interest rate and paying that loan back over 30 years will cost you over $30,000. You end up paying over double the loan because of the interest rate. However, if you pay this loan off in fewer than 30 years, you’ll end up saving as well.
Moral of the story, majority of the time, the lower the interest rate is, the less you’ll end up paying back over the repayment term of the loan. When selecting a loan, just make sure the terms are right for you as well. Some lenders will give you a lower interest rate, but they want you to begin repayment immediately, which is not always feasible. As important as it is to pay attention to the interest rates when applying for loans, it is also important to pay attention to the terms.
One of the best ways to pay back the least amount of money in interest is to borrow a loan with a low interest rate and repay it as quickly as you can (without over extending yourself), so a ton of interest doesn’t accrue! Just make sure you check with your lender before paying a loan off quicker than the repayment terms. Some lenders may charge you a fee for doing this.
Tip 2: Do your Research:
Don’t settle.. for anything, but especially for an education loan. Just like clothing stores, phone companies, colleges, universities and others, lenders are in competition with each other. Be sure you explore all of your options to see who has the best loan product for you. Don’t pick a loan or a lender just because it was the first one you saw or because it’s the one your friend went with. The loan that works for your best friend might not be the loan for you and vice versa. Different lenders offer different interest rates, terms and conditions, so it’s important to explore and see what works best for you, while the following the suggestions given in Tip 1.
While we cannot recommend any one lender over another, we do provide our students with a historic list of lenders. The list includes all lenders from whom Stockton University students have borrowed within the past three (3) years and you can compare lenders on the list to see who has the best interest rate and terms for you. You can access the list at stockton.edu/finaid. Although we provide you with this list, you can apply for a loan from any lender you choose. It does not have to be someone on the list we provide. The list is there to serve as a guide to understanding where to get started and how to compare different lenders.
Tip 3: Don’t Overborrow:
Overborrowing is another one of the biggest mistakes that students (and sometimes parents) make when borrowing education loans. The Cost of Attendance (COA) includes direct costs like tuition, fees, housing and meals (if a student is living on-campus) as well as indirect expenses like books, supplies, transportation, housing and meals (if a student is living off-campus) and other miscellaneous expenses. This means that to account for these other expenses that students may incur as a result of attending school, the COA is usually more than the bill. A student’s financial aid (grants, scholarships, work study and loans) cannot exceed the total COA, meaning that students can borrow loans (minus other financial aid) over what they need to cover the bill until they reach the COA. Granted some students really do need the extra funding and it’s fine if you do, but some students borrow up to the COA and do things like let the money sit in the bank to save it or use it to buy things when they already have the funds to pay for what they are purchasing. When you do these types of things, interest accrues the entire time, which means that the money that you borrowed today is going to cost you more tomorrow.
If you truly need the money, you’re entitled to it. Just make smart decisions when it comes to choosing a loan and a repayment option. If you don’t truly need the loan, don’t borrow it. Trust me, you’re going to save yourself tons of money in both principle and interest over time.
Tip 4: Consider making payments while you’re in school:
This one could really help you out! Making payments on your loan or even just on the interest on your loan while you’re in school will help you save some money in the long run. The quicker you pay off your loan, the less you’ll pay over time.
If you can’t afford to make full payments, you could make interest payments on your loan while you’re in school. As explained in Tip 1, interest is the percentage that a lender charges for you to borrow their loan. Interest accrues (accumulates over time) based on the percent of your interest rate and keeps accruing until you pay off the loan. The higher the rate and the longer you take to pay off the loan, the more interest you will end up paying. Each time interest accrues, it is added to the principle (the amount that you originally borrowed) of your loan. Then, more interest accrues on not only the principle, but the interest that was added to it. If you defer all payments, including interest payments on your loan(s) until after you graduate, you’ll continue to increase the total amount that you have to pay back on the loan for the amount of time you go without paying it. If you pay the interest on your loans while you’re in school, no interest will be added to the principle balance that entire time, which will decrease the total amount you have to pay back on your loan(s) in the long run.
Final Thoughts:
Okay, I know this is a lot, so let’s recap.
- Understand Interest Rates and Terms: The lower the interest rate and the quicker you pay off your loan, the less you will end up repaying on the loan over time. Be sure to select the loan with the lowest interest rate that has the best terms for you.
- Do your Research: Don’t just borrow from the first lender you see. Make sure you understand the information presented in Tip 1 and then search for the right lender for you.
- Don’t Overborrow: Don’t borrow more than you truly need. It’ll just cost you more later.
- Make In-School Payments: Making payments on the interest (or on your loan in general) while you’re in school will keep some interest from accruing on the principle of your loan for however many years you’re in school. This means that you’ll end up paying less over time than you would have if you let the interest accrue without making any payments.
At Stockton, we want to see our students succeed. Borrowing might not always be the most fun topic or the one we really want to talk about, but it’s a necessary thing that many people need to do to fund their educational investment. The most important thing to remember when borrowing is to do it responsibly. You wouldn’t choose a college blindly, so don’t choose a loan that way!
We are always here to help you with any questions you may have. For more information on borrowing and financial literacy, visit stockton.edu/finaid. Feel free to contact us at stockton.edu/contactfinaid with any additional questions you may have.