NextStudent Adivsors

How To Compare Lenders 

What You Need To Know When Choosing a Money Lender 

There are two major categories of student loans, federal programs and private loan programs. Private loans are also called alternative loans. There are several differences between these two loan types. 

One difference between the two major categories focuses on how the loans are governed.  Federal loans are regulated and fully insured through the federal government.  Although they are still monitored to ensure that credit-related regulations are being followed, private loan terms and conditions are determined more by the private lender providing the funds, and their insurance agency, than by the federal government.

Also, a private loan lender has more flexibility in the terms and conditions that they offer. However, it does come at the price of the overall cost of the loan being higher to the borrower.

Another difference applicable to these types of loans is the way the fees are handled. For a federal loan, the fees are subtracted from the amount of the loan prior to its distribution. For instance, if you have $400 in fees, your disbursement amount will be the total loan amount minus the $400. With a private loan, your fees will be added to the loan total. You will receive the full loan amount in disbursement, but the total loan amount on which you will begin repayment will be the loan amount plus the $400.

Obtaining A Federal Student Loan

There are two federal programs that distribute loans to students. The program through which you receive your school loans depends on which program the college you are attending participates.  If you attend a school that participates in the Federal Family Education Loan Program (FFELP), you will receive your funds from a private money lender. If you attend a school that participates in the Federal Direct Student Loan Program (FDSLP), your loans will be supplied by the government. The rules, interest rates, application process, and receiving process are the same for both types of loans.

Shopping for a Federally-Authorized Student Loan Lender

FFELP loans are the largest source of educational funding available, so there are many private lenders from which to choose. What should you look for when selecting a private lending company to fund your federal school loans? Certainly, you will benefit from looking around, but not for the reasons you might think. 

Because the standards for federal student loans are set by the government, you are not going to find variations in the base interest rate or repayment options, lender by lender. The differences come from the lending institutions themselves. The money for “better deals” comes from the lender. Many lenders will provide incentives or “borrower benefits” that will help reduce monthly payment amounts, based on the borrower meeting certain specific qualifications. 

Examples of Incentives a Lender Might Utilize Include:

• Offering discounts on the fees associated with receiving the loans. 
• Reducing the interest percentage on the borrower making a predetermined number of successful, on-time payments. 
• Granting a reduced interest percentage to borrowers who pay their loans through automatically-scheduled debits from checking accounts. 
• Extending grace periods. 
• Flexible payment plans that start small and increase with a college graduate’s expected salary increases, as time passes. 

Be sure to research the incentives offered by each money lender. Find out how many borrowers actually end up qualifying for specific incentives, because the requirements are usually quite stringent. Many incentives sound excellent, until you realize that very few borrowers actually benefit from them, which is due to qualification difficulties. 

Who is going to give you the best service?

This is a very important question that all students need to stop and ask. Yes, getting the best interest rates, repayment options, loan fees, and terms are important, but what is the lender going to be like when you ask questions after you have received the loan.  And, in fact, you will have questions. Is your lender going to provide you with on-going, personalized service, or will you be directed to an automated voice machine, which answers your questions based on numerical keys that you push? 

On the surface, the lenders with the most appealing incentives may not be the vendors who are able to satisfy you as a customer in the long run. What is the chance of your speaking to an actual person if you have questions? Do the customer service representatives have direct lines, so that you can continue to deal with the same helpful person until your problem is solved, or will you be forced to deal with a voice message, at a random call center, when you make the call? 

Shopping For A Private Student Loan Lender 

Many of the benefits listed above hold true for private student loans as well.  Other differences to watch for with private lenders are interest rate “tiers.”  Many private loan lenders will advertise their best tier loan rates, but neglect to mention that less than ten percent of applicants who apply actually qualify for this rate.  This is because the rates on private loans are heavily dependent on the credit score of the applicant, and whether there is a coapplicant for that loan.  

There are also many types of fees private student loan lenders include, to increase the total amount of money the borrower must repay.  If you want to borrow $2,000, this can cost you as much as $3,000, just by adding in the initial fees charged by the lender to obtain the loan.  Again, lenders may only disclose their best-fee structure, based on the same tiers as the interest rates.

These skewed, hidden costs in private student loans are why it is extremely important to specifically request a “Good Faith Estimate,” (GFE) for your loan before signing any documentation that will commit you to the loan.  So, procure as much information in writing before you get the loan.

Specific Questions to Ask A Potential Money Lender

If you are interested in finding the best lender and the best federal student loan for your college loan needs, ask the following simple questions: 

1. How long has the lender been providing student loans?
2. Can the lender demonstrate that their company is financially secure?
3. Who is the loan servicer?
4. What fees does the lender charge?
5. What is the range for the interest rates offered on the loan?
6. Who performs customer service for your loan? What training or qualifications do these people have?
7. Can you certify the lender’s compliance with applicable regulations? Are you able to get a copy of lender policies and costs in writing?
8. In addition to the loan itself, what fees does your lender charge?
9. Does the lender offer a rebate for the loan fees?  If so, when do they rebate fees to you, and on what is the principal amount of your rebate based?
10. Can you earn any interest rate or cost reductions on your loan? If so, when does this occur?
11. What do you have to do to retain your benefits?
12. Do you lose benefits if you make a late payment? If so, are the benefits lost forever? Are there any methods of recouping those benefits?
13. What affect, if any, would loan consolidation have on your eligibility for benefits?
14. Would you have to repay earned benefits if you consolidate your loans with another lender?
15. Will your lender disclose the terms and conditions in writing for your loan discounts and benefits?
16. What is the fine print in your lender’s documents for your loan, including all terms and conditions? Can you get their Good Faith Estimate (GFE) in writing?