Managing Student Loans

Federal student loans are at an all time high with more students applying and qualifying for the federal Perkins loan and the Stafford subsidized and unsubsidized loans on offer. Interest rates have been lowered, as the Department of Education has saved an estimated $60 billion by cutting out the middlemen previously used to issue federal student loans, and issuing them directly from the department. Federal student loans should be the first port of call for any student borrowing, and offers a straightforward process.

On submission of the FAFSA a student is assessed for eligibility of the Pell Grant and federal loans, once the families expected contribution has been determined. The process of application is free, and the loans are issued with a fixed rate of interest and clear terms and conditions. However the rising costs of a college education mean that a proportion of students are unable to meet the costs of college through federal student loans alone, and need to turn to private student loans.

When applying to a private lender the student and co-signer, if there is one used, should pay particular attention to any indirect costs associated with the loan. Unfortunately many of the indirect costs are not disclosed at the time of application, and cautious applicants should ensure that they are fully apprised of any indirect costs, especially those which might apply when it comes to repayments.

Many private lenders have ended the practice of charging origination and disbursement fees when an application is made. Instead these costs are automatically built into the interest rate charged. Students should check carefully to see if either of these fees are added by the lender, but it could result in a lower interest rate if they are.

No one expects to have difficulty repaying their student loans when they are first issued, but there are times when requesting a deferment of payment or forbearance may become a necessity. Check if the lender charges for this, as although Sallie Mae for example does not reveal a charge for this on their website, borrowers in 2009 were being charged $50 to arrange a 3 month deferment. Also although the site does state that late payments result in a late fee, it does not disclose the level of the fee.

These indirect costs need to be considered in case there is a worst case scenario. Sallie Mae also fails to reveal if there will be a charge to change repayment plans, a proviso which is advertised. Students should check if payment difficulties would result in an interest hike as it does on credit cards.

These are all indirect charges which will accrue additional interest and should be taken into account before acceptance of a private loan is given. Applying to a variety of lenders and asking for a full disclosure of indirect fees could save the later worry of student loan debt increasing if one encounters circumstances which result in difficulty making repayments.

Additionally every student should check if the lender they are considering applies any penalty fees for over payments or early redemption of the loan. Lenders which apply penalty fees should be avoided, as the best scenario to hope for is that private student loans can be repaid in a shorter than agreed term to reduce the total amount of interest charged.

Before any private student loan is applied for the student or co-signer should ask these questions upfront and thus be prepared for any undisclosed indirect charges. Upon approval of a loan then the paperwork should be gone over in great detail to ensure there are no indirect charges in the small print. It pays to invest the time to ensure that everything is understood to avoid any surprises when repayment of the loans falls due.