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In today’s world, getting a student loan seems inevitable—if not, you probably have some credit card debt or car payments to pay off first. As a matter of fact, the average college graduate owes over $37,000 in student loans upon graduation, according to the College Board. That figure is likely to rise because the United States Department of Education estimates that roughly 40% of students who borrow money to attend private colleges take out additional loans to cover tuition costs.
So what makes certain private student loans superior to others? Here’s how we came up with our ranking of the top 5 private student loans.
1. The Direct PLUS.Loans from Nelnet (Nelnet)
The Nelnet Direct PLUS loan offers flexible repayment options and competitive rates. Plus, with the option to apply online, paying back the loan is simple. While borrowers don’t need collateral to get approved, they do require good credit and income verification. There are no origination fees, prepayment penalties, or interest-rate hikes.
2. FFELP (Family Educational Loan Program)
This federal program was created along with the Higher Education Act of 1965 to encourage students to complete postsecondary education and provide them with low-cost funding. Under FFELP guidelines, the maximum amount of debt per borrower is $23,500, and the interest rate is fixed at 4.21% (up to 6.31%). Loans are funded without regard to your credit score, and applicants receive a free copy of their FAFSA after they submit it.
3. Astute DecisionSallie Mae (Smart Choice)
The Smart Option is designed for undergraduate students who want to consolidate their existing loans and graduate debt into one convenient monthly payment plan. Borrowers should expect to pay about 1.75% APR compared to 8%+ under traditional consolidation plans. A down payment isn’t necessary either, since the government grants 100% financing and lenders may even waive the credit check requirement.
4. National Direct Student Loans (National Direct
Undergraduate borrowers looking for non-profit schools can apply for National Direct’s Public Service Loan Forgiveness Plan. If eligible, this loan forgiveness program eliminates the remaining balance of their debt after 10 years of public service employment. The interest rate is set at the same rate as any other direct loan, except the grace period is only six months instead of seven.
For those who have already taken out a student loan and wish to reduce the total amount they owe, this is the best choice. Borrowers of the Navient loan can save an estimated $1,000 to $1,200 compared to other programs. Like its competitors, the company applies a variable interest rate to each loan and charges origination fees of 0.50%.
It’s no secret. You’re paying way too much for your student loans. Whether they come off your credit card at checkout or come due first thing Monday morning, nothing helps quite like some good old-fashioned debt leverage. Thanks to a handful of private student loan companies, you may soon have a whole host of services and rates to choose from while leveraging their service versus your own.
In my research, I noticed students tend to fall into two categories: those who use private student loans to help finance their education and those who don’t. Those who don’t use them? They’re making just as little as we are—if not less than what they’d pay if they used a traditional bank.
The benefits of using private student loans to finance your college education are many! But how exactly do these work? Let’s go over a few different options.
The biggest advantage people cite is interest rate comparison. Here’s how they work: Say you apply for $20,000 in student loans and are accepted into three schools, each offering you $10,000. Your total cost would be $30,000 ($10,000 x 3). That’s assuming none of your school’s financial aid goes towards offsetting the total cost of tuition.
The real scenario looks more along these lines: If the same student had been offered $15,000 worth of financial aid at each school, they would end up paying $45,000 to attend the school. Their actual cost of attending would be roughly $50,000 – $35,000 to $15,000. Add on whatever extra money they need to cover their books and housing, and you get $15k + extra.
So.. where does the difference in interest rates come in? Well, let’s say you decide to take out the same amount, but instead of going with a standard bank, you opt to take out private student loans from three separate lenders. Let’s look at your interest rate:
$15,000 @ 5%A year’s rent is $750 per month.
$15,000@ 4% A year’s rent is $600 per month.
$15K@ 6% A year’s rent is $900 per month.
That’s $1,875 in additional interest for you to pay each month. On top of that, you’ll have to factor in the APR (annual percentage rate) associated with each of these loans.
If you plan on taking out more than a couple thousand dollars per year, you might want to consider consolidating your student loans—but only after carefully comparing interest rates and fees between various providers. If you find yourself in this situation, there are several student loan repayment programs available to assist you. One option is called Income Based Repayment, or IBRA, which caps your payments at 10% of your discretionary income and forgives interest once you’ve paid back 20 years of principal. Another program is Pay As You Earn, or PAYE, which caps your payments based on your current earnings level. And finally, there’s the Graduated Payment Plan, or GPP, which will allow you to make smaller payments throughout your entire career. All of these programs offer different flexibility levels that will eventually lower your payment amounts and balance over time.
There are disadvantages to using private student loans, but they aren’t nearly as bad as they seem. First, you won’t be eligible for any federal aid. Second, you’ll have to pay taxes on your loan. Third, you could potentially lose out on future job opportunities down the line should there be a question about your employment history.
Direct Loan Program (FDLP) at The federal direct loan program was started in 1965 under President Johnson and expanded to students enrolled in educational institutions participating in Title IV programs in 1970. The FDLP offers loans at fixed interest rates and without prepayment penalties. Under the FDLP, the U.S. Department of Education guarantees loans made to eligible student borrowers by private lenders. Eligible schools include public and nonprofit independent postsecondary educational institutions. As of the 2011-12 school year, federally guaranteed student loans totaled $85 billion. The average amount of debt per borrower was $26,000, and the total number of borrowers reached nearly 30 million.
2. Perkins’ Loan Perkins loan
It is a type of loan offered through bank lending companies. Because of its ease of use, popularity, and flexibility, many financial institutions offer Perkins loans to their customers. A student who takes out a Perkins loan would pay back his or her lender according to a set schedule. If the student chooses not to repay the loan, then the money he/she borrows is added to the principal balance until the entire balance is repaid.
3. Stafford Loan with Subsidy
A subsidized Stafford loan is a type of subsidized loan, which means the government pays some of the interest charged on the loan while the student is still in school. By law, the student’s monthly payment cannot exceed 10 percent of his or her discretionary income. In addition, the loan must be paid off within 20 years or the remaining balance becomes due immediately. However, if the borrower fails to make payments after 60 days, the unpaid portion of the loan accrues interest at a variable rate equal to the prime rate published in the Wall Street Journal plus 2 percent. After five years of making payments on a subsidized loan, the borrower may apply for an unsubsidized loan, thereby eliminating any future obligation to pay interest.
4. Stafford Loan, Unsubsidized
The unsubsidized Stafford loan is similar to the subsidized version except that the government does not pay the interest on the loan. Rather, the lender charges the borrower an interest rate greater than what is allowed under the loan program. An example of a higher interest rate is 9.8 percent, which is two points above the maximum allowable rate of 6.8 percent. The difference between the lower rate and the higher rate helps cover the costs incurred by the lender.
5. The PLUS Loan
The PLUS Loan is designed to help parents finance college education costs. whereas parents of non-dependent children can only use their personal savings. To qualify for a PLUS loan, the parent must be employed and have a steady job, and the student must be enrolled full time in an eligible institution.
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