Which Loan Is Best for Your Child?
Comparing loans isn't always easy, since the loan terms can vary. Here are some items you need to consider when comparing loans.
Four Key Variables
The four most important variables to consider are interest rate, whether loans are subsidized or not, loan fees, and repayment options.
Interest Rate
The lower the interest rate, the less expensive the loan, and the less your child will repay over time.
Subsidized or Unsubsidized?
Loans based on financial need are subsidized. This means that the federal government pays the interest on the loan while your child is in school. This benefit makes the loan much less expensive for your child. If your child qualifies, she should always borrow a subsidized loan first.
Fees
Most loans have origination and other processing fees. This means that although your child borrows (and must repay) the entire loan amount, say $2,500, she may only receive $2,400 after the fees are deducted. So, keep your eyes on these fees.
Repayment Plans
Some offer a full range of repayment plans as well as incentives, such as interest rate reductions for on-time payments. Before borrowing a loan, make sure your child understands the repayment requirements and options.
You Pay Back More Than You Receive
Even with the favorable terms of a student loan, whenever your child borrows money, she will pay back more than she receives. Your child should only borrow what she needs.
Find the Least Expensive Loan
Try first for the least expensive loan. The least expensive loan is generally the loan with the lowest interest rate. In order, they are:
- Perkins
- Subsidized Stafford/Direct
- Unsubsidized Stafford/Direct
- Private
Note: If your child has access to a special loan program from a college or private source, find out the terms and compare them with the terms of the loans above.
File the FAFSA
If your family is thinking about taking out a loan, you or your child should file the Free Application for Federal Student Aid (FAFSA). If your family demonstrates need, the loan will be less expensive than if your family borrows outside of need. The federal rules will help guide you since the FAFSA is required before the college can approve an unsubsidized loan.