More students are borrowing money to enter school, and even more students are leaving with it. With college costs through the roof, the average American scholar leaves a four-year college with more than $23,000 in student loan debt. Considering that half of all students do not need to borrow money, we can infer that the average student that borrows money is leaving with far more than $23,000 in debt. This is why low interest college loans are so important—it’s one thing to borrow money, and another thing to borrow inexpensive money.
Low interest college loans are almost a necessity. That is, assuming that you can borrow through traditional vehicles and lenders—private or public—the price you pay to borrow money for college is far less than you might pay to buy a car, purchase a home, or to purchase a new sofa.
Low Interest College Loans
College loans are secured loans. Unlike other loans, however, college loans aren’t secured against property; they are secured by your future income. A college loan is a nonrecourse loan, meaning that you can’t just stop paying on a college loan. A lender has a right to reclaim the money that they have lent to you, even if it means garnishing your wages. You can thank the countless people who decided decades ago that it made more sense to go into bankruptcy after college than it did to repay the loans.
Today, student loan companies offer very low interest college loans because they know it is the safest loan they can possibly make. As long as you are living, you will be repaying your loan; it is as simple as that.
Stafford loans are great low interest college loans because they are widely available. In filling out a free application for federal student aid, you are enabled with the ability to borrow up to $19,000 in unsubsidized loans at 6.8% annual interest rates.
The best part about a Stafford loan is that there is no credit check. To receive a Stafford loan, you need to have some financial need (most people have financial need, regardless of how wealthy they may be), be a citizen of the United States, be at least 18 years old, and have not been convicted of a felony. Additionally, you need to avoid having defaulted (failed to pay) on previous college loans. Most people fit into these criteria; getting a Stafford loan is almost as easy as just showing up for the money.
Private loans can be harder to get than Stafford loans; however, their difficulty is rewarded with lower rates than Stafford student loans. Private loans are loans that are provided by a bank, not the government.
The application process for private loans isn’t as easy as simply filling out the FASFA. Instead, you’ll need to go to the lender directly (if you are currently taking classes, you’ve undoubtedly already received an offer for loans).
In applying for a private loan you’ll also need a consigner if your income as an individual isn’t high enough to warrant a loan. In general, the threshold for income is $20,000 or more per year. But don’t give up just yet; after applying with a private loan company, you’ll be awarded with a low interest private loan with rates of 4-5% per year or lower.
In fact, many companies offer shorter-term loans (5-10 year loans) with interest rates of just over 3% per year for on-time payers. Plus, it is becoming a common theme with private student lenders to offer a .25% interest rate rebate just for making payments on time. What could be better?
Locking in a Low Interest Loan
Current and prospective students should be encouraged to lock in their rate on any loan they accept from private lenders—public loans from the Department of Education are already fixed-rate. Locking in the rate means that you’ll pay a slightly higher rate in the beginning, but should rates rise on other loans, your rate will never rise.
Instead, a fixed-rate loan means that you’ll be required to make the same monthly payment regardless of interest rates. This is especially important for private loans as they often require that the student make very small monthly payments (usually $25 per month, or less) during their time in school. From Freshman year to graduation, a timeframe that can extend from 4-5 years, interest rates can rise by as much as 4-5% as they did in the period from 2002-2006. These rising rates doubled many students’ monthly payments. Don’t fall into the trap of limited predictability.