Co-Signer
For a student to take out a loan as the primary borrower he/she must have a co-signer. A co-signer is someone who (as implied) signs for the loan along with the primary borrower. If at any time the student (primary borrower) defaults on the loan it is the co-signer who takes over responsibility for the loan. Most lenders have a few exceptions that allow a student to borrow on his/her own. While the criterion changes depending on the lender for the most part a good credit score, proof of an annual income of approximately $18,000, and (at times) a specific age is required. Some banks offer co-signer release programs.
Tuition Based vs. General Need
An important aspect of the loan you must understand before applying are the restrictions placed on the funds. Some loans are solely for the purpose of tuition. These loans require certification of attendance at your institution (the loan company will contact the school for this) before the funds will be transferred directly to your college/university. These loans are also known for having deadlines (the money can not be used for a past semesters bill). Other general need loans are intended for college expenses (books, computers, supplies, tuition) and this money is sent directly to the borrower. It is important to know what exactly you will use your loan money for so you can choose the loan that best suits your needs.
How Much to Borrow
Almost all loans have restrictions on the amount of money you can borrow for a given year. Before proceeding with an application it is important to know if your need falls within the minimum and maximum range of fund availability.
Interest Rates
There are two choices to make when it comes to your interest rates; variable and fixed. With fixed rates the interest will never change throughout the life of the loan. What you start with is the same rate you will end with. Variable interest rates, however, change with market conditions. It is viable that the rates may decrease and therefore decrease monthly payments as well. On the other hand, rates may also rise, leading to monthly payments that are unattainable forcing you to work out a new payment plan. When planning on loans with variable interest rates, it is important to think about what the market might do and to look into interest rate caps. Some lenders have minimum monthly payments, regardless of what the market might do.
Interest
The APR (annual percentage rate) is the interest rate that results from the advertised interest rate and the cost of borrowing (capitalized interest, repayment options, fees, etc.). The APR given on a website is the estimated rate given current market conditions, the real APR can not be determined until the loan has been paid off.
Repayment Schedules
When looking into college loans there are typically three payment options:
Immediate Repayment
This means that you begin paying of the primary (amount of loan) on taking out the loan. Immediate repaying of the loan saves the borrower money: there is less interest to pay (usually makes a few thousand dollar difference) and at times lenders will lower interest rates for those who pay chose this option.
Defered Payments
Both the interest and the primary are deferred until after graduation. While this is the most desirable option while in college (since you don’t have to worry while in school) it is also the most costly. The interest capitalizes throughout the loan which means that accumulated interest is periodically added to the primary amount borrowed and in turn, accumulates interest on its self.
Interest Only Payments
With interest only payments the primary is deferred until after graduation and only the interest is paid off monthly. I would personally recommend this option. While it is not as cost effective as starting payments from the moment the loan is received it prevents the interest from capitalizing (saving a few thousand dollars) and still allows for a decently worry-free college experience.
One key thing to look into when applying for a loan is an early repayment fee. Some lenders have financial charges for paying off a loan before the end of the payment period. When borrowers pay off a loan too soon the lender does not make as much money in interest (often charges compensate for this). While it is seldom that opportunities to pay off loans in full arrive it is still an important payment penalty to look into.
Given the risk a co-signer takes on when signing with a student borrower it is often necessary to look into co-signer release programs. These programs allow for the co-signer to be released from loan obligations. While the criteria for a release changes most require 48 successful/on time payments and a good credit score.
