Written By Kevin Payne
For students looking to fund their education, the world of student loans is ever changing and growing — and the complexity can be intimidating. It’s easy for an information overload to occur, making it hard to know what to do.
Are you making the right decision? How will this affect your finances and your lifestyle later on? Will you have to delay certain pursuits because of massive student loan debt? These questions can weigh on you.
Everyone’s situation is different, and there’s no single perfect student loan for everyone. With that said, there are some specific details you can focus on to help guide you toward the best decision for your circumstances.
Federal student loans vs. private loans
One decision you’ll need to make is whether to take out federal or private student loans. Perhaps you’ll need to have both, but there are pros and cons to each option.
Federal student loans
As a general rule, federal loans are one of the best student loan options, so it makes sense to exhaust them before taking out private loans. Federal loans provide access to income-driven repayment plans and loan forgiveness options. They also come with federal protections, like forbearance and deferment.
Below are current interest rates for federal student loans.
2018-19 federal student loan interest rates
For loans disbursed on or after July 1, 2018, and before July 1, 2019.
| Loan type | Borrower type | Fixed interest rate |
|---|---|---|
| Direct Subsidized Loan | Undergraduate | 5.05% |
| Direct Unsubsidized Loan | Undergraduate | 5.05% |
| Direct Unsubsidized Loan | Graduate, Professional | 6.60% |
| Direct PLUS Loan | Parent, Graduate, Professional | 7.60% |
| Perkins Loan | Undergraduate | 5.00% |
2019-20 federal student loan interest rates
For loans disbursed on or after July 1, 2019, and before July 1, 2020.
| Loan type | Borrower type | Fixed interest rate |
|---|---|---|
| Direct Subsidized Loan | Undergraduate | 4.53% |
| Direct Unsubsidized Loan | Undergraduate | 4.53% |
| Direct Unsubsidized Loan | Graduate, Professional | 6.08% |
| Direct PLUS Loan | Parent, Graduate, Professional | 7.08% |
| Perkins Loan | Undergraduate | 5.00% |
Federal student loans have fixed interest rates. Most of them come with standard 10-year repayment terms, except Direct Consolidation Loans, which are set between 10 and 30 years. Federal loans also have loan origination fees, which not all private loans have.
When are federal student loans your best option?
As mentioned, for most borrowers it makes sense to pursue federal student loans first. This is especially true if you’re unsure of your financial future after graduation.
If you’re going to start your career at a lower-paying or entry-level job, applying for one of the federal income-driven repayment plans is a great option. If you have any inkling that you may qualify for Public Service Loan Forgiveness (PSLF), stick with Direct federal student loans.
Private student loans
The process of receiving federal funding can take time because of the FAFSA, or Free Application for Federal Student Aid, process. If you’re in need of student loan funds quickly, the private loan process is usually quicker. Private loans can also fill the gaps that federal loans don’t cover.
Private student loan rates vary by lender, and each lender has its own criteria for analyzing a borrower’s credit. Rates can also be variable or fixed, depending on the lender. Additionally, your terms will affect the kind of rate you can get.
Best private student loans: Tips to find lower interest rates
There are things you can do to secure a lower interest rate, which can save you money over the life of your loan. These are some of the best ways to lower your rate:
- Shop around: Look at all of your student loan options and then choose the ones that make the most sense. When initially applying for a loan, know that most lenders will do what’s called a soft pull when checking your credit. This shouldn’t hurt your credit score.
- Work to lower your DTI: Having a good debt-to-income (DTI) ratio shows lenders you’re a low-risk borrower. You’re more likely to get approved and score a better interest rate and terms with a lower DTI.
- Find a cosigner with excellent credit: The better your cosigner’s credit, the better rates you’ll be offered.
- Autopay reduction: Many private lenders offer a 0.25% interest rate reduction if you set up automatic payments from your bank account.
Refinancing your student loans
Maybe you already have less-than-desirable student loans. The good news is that you can refinance your student loans.
With refinancing, your loan debt is paid off by your new lender, and you end up with a new loan, new interest rate and terms. This is a smart choice if you’re in a great place financially or have a high interest rate.
Another perk to refinancing your student loans is earning cash-back bonuses from private lenders.
But note that refinancing federal loans turns them into private loans, and you’ll lose access to benefits, like income-driven repayment plans and loan forgiveness. If you think you may want to pursue loan forgiveness programs like PSLF, it’s best to hold off on refinancing for now.
8 main factors when looking for the best student loans
When determining the best student loan options for you, there are many factors to consider.
1. Interest rates
Perhaps the most important factor in your search for the best student loans is the interest rate. As mentioned earlier, federal rates are fixed and won’t change for the life of your loan.
Every private lender has different rates available. A lower interest rate will result in paying less interest, saving you money. Scoring a super-low rate has the potential to save you thousands or tens of thousands of dollars.
2. Fees
No matter what type of loan or lender you’re looking at, read the fine print to check on loan fees. The most common one is a loan origination fee. You want to avoid fees when possible, but if you can’t, be sure to factor it into how much you’ll end up owing. Origination fees for student loans come out of your disbursement before the funds come to you.
3. Loan term
Terms can range from as low as three years up to 25 years. With private student loans, shorter terms often result in a lower interest rate.
If you’re ready to take action and pay off your debt quickly, this is a great money-saving strategy. But if your finances aren’t stable enough to do that, it’s probably best to secure a longer term.
4. Repayment plan options
Federal loans have access to great income-driven repayment programs, like the Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE) plans. There are also other options, such as graduated repayment and extended repayment. These are great payment alternatives if you’re entering a lower-paying entry-level job or are planning to pursue loan forgiveness.
5. Cosigner release
If you’re going for private loans, you’ll likely need a cosigner if you don’t have a robust credit profile. Your cosigner is on the hook for your student loan debt if you can’t make your payments.
Some private lenders offer cosigner release. This relieves the cosigner of any responsibility after certain criteria is met by you, such as consistent, on-time payments for a specified amount of time.
Another option is to find a private loan that doesn’t require a cosigner.
6. Forbearance options
With federal loans, you have access to protections like loan forbearance. Forbearance allows you to pause payments on your student loan debt.
Federal student loans allow forbearance for up to 12 months without penalty. However, interest will continue to accrue on your loans. Many private lenders also offer forbearance options, but usually, it’s more of a short-term solution. Private lenders also have their own rules and regulations concerning forbearance.
7. Your education path
The best student loan for you also depends on your educational choices. This includes what school you choose and your career path. If your career requires advanced degrees, you’ll have options for both federal and private loans.
8. Your financial situation
Your finances play a big part in student loan choices, too. Most college graduates don’t have established credit, and your starting salary might not be that high, depending on your career choice. This should factor into what the best options for repaying your loans look like for you.
There’s a lot to think about when picking student loans. The best student loan is the right one for you and your specific situation — but there's no one right loan for everyone. It’s an important decision and could affect you for the next 20-plus years. Take the time to do your homework and learn your options.
