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For undergraduates and graduates considering student loans to help pay for their education, finding a low interest rate loan is important. Understanding how rates are set and how they potentially change over time can help you decide which loan is best for you. Let’s take a closer look at what determines the interest rate on various types of loans.

Direct Loans

The largest student loan program in the United States is the Direct Loan Program and is offered directly through the federal government. The formulas for setting interest rates for the Direct Loan Program are determined by Congress. Currently, the interest rate is set as a fixed rate for all loans first disbursed on or after July 1 and by June 30 of the following year. So, any loan first disbursed during that one-year window will have the same interest rate for the life of that loan.

The interest rate is the index plus an add-on or margin. In the case of federal loans, the financial index used is the 10-year Treasury note auctioned at the final auction held prior to June 1. That index is then used for new loans first disbursed in that following July 1 – June 30 timeframe.

The following chart represents the interest rate calculations for federal Direct Loans first disbursed on or after July 1, 2020 and before July 1, 2021.

Borrower Type Index (10-Year Treasury Note) Add-On (margin) Fixed Interest Rate
Direct Subsidized Loans Undergraduate Students 0.700% 2.05% 2.75%
Direct Unsubsidized Loans Undergraduate Students 0.700% 2.05% 2.75%
Direct Unsubsidized Loans Graduate/Professional Students 0.700% 3.60% 4.30%
Direct PLUS Graduate/Professional Students and Parents of Dependent Undergraduate Students 0.700% 4.60% 5.30%

Private Loans

For private student loans, the interest rates will still be based off of a financial index (although the exact index may vary by lender) plus a margin. However, other factors will also go into determining the interest rate on private student loans. The borrower’s credit score (or cosigner’s credit score) is a determining factor in the interest rate assigned to a private student loan. A high credit score may translate to a low interest rate. Another factor that can determine the interest rate on a private student loan is the length of the repayment term. Typically, a longer repayment term means paying a higher interest rate.

Fixed Interest Rates

Private student loan lenders will usually set their fixed interest rates prior to July 1 for the upcoming school year. That fixed rate will remain constant for the life of the loan. Lenders may adjust their fixed interest rates each year for new loans or even during the year if there is a dramatic change in market conditions.

However, once you’ve received your loan, your fixed interest rate for that specific loan will remain the same until the loan is paid in full. Your monthly payment will also remain constant for the duration of your repayment term.

Variable Interest Rates

When private student loan lenders set their variable interest rates, they may use a different financial index. Some lenders will use the 1-month LIBOR (London Interbank Offered Rate) where the variable interest rate will fluctuate monthly based on changes (up or down) in the 1-month LIBOR. Other lenders may use the 3-month LIBOR and adjust their variable interest rates quarterly (every three months).

Finally, other lenders may use the Prime Rate as their index and adjust their variable rates monthly. The bottom line is that your variable interest rate will likely change each month or quarter and your monthly payment will also go up or down based on your rate increasing or decreasing.

So, is any particular type of index better than another when evaluating interest rates from different lenders? You really need to know what the index rate is as well as the margin being added. For example, if you see an offer for an interest rate of “Prime + 1.5%” that might sound pretty good compared to an interest rate of “1-month LIBOR + 4.50%.”

Visually, it just looks like the first rate would be lower. However, if the Prime Rate is 4% and the 1-month LIBOR rate is 1%, both rates would equal 5.50%. It’s always a good idea to look for a lender’s Application and Solicitation Disclosure to see the true interest rate calculations.

It’s that time of year again. That is to say, it’s time to gather all your paperwork, W-2’s, receipts, statements, and related documents and work on your tax forms. Consequently, here are a few key education tax benefits to help you get the most possible deductions. You can find more information in IRS Publication 970 Tax Benefits for Education. This includes all the information you need, including sample forms and worksheets.

Education Tax Benefits

Certain tax benefits are available if you are saving for or have paid for educations costs. In general, most benefits apply to higher education. They may be allowed for you as a student, or a member of your immediate family who was a student. Usually, you can’t use the same qualifying education expense for more than one tax benefit. Certain benefits may be ruled out based on your income. Here are the education-related items from Publication 970:

  • Scholarships, Fellowship Grants, Grants, and Tuition Reductions
  • American Opportunity Credit
  • Lifetime Learning Credit
  • Student Loan Interest Deduction
  • Student Loan Cancellations and Repayment Assistance
  • Tuition and Fees Deduction
  • Coverdell Education Savings Account (ESA)
  • Qualified Tuition Program
  • Education Exceptions to Additional Tax on Early IRA Distributions
  • Education Savings Bond Program
  • Employer-Provided Educational Assistance

Below are three general education tax benefits. Be sure to review IRS Publication 970 for all possible benefits. Seek help from a licensed tax professional to take full advantage of education tax benefits.

Student Loan Interest Deduction

Is your modified adjusted gross income less than $80,000 (or $160,000 if filing a joint return)? Did you also pay interest on a qualified student loan for higher education expenses? If so, you may be able to reduce the amount of your income subject to tax by up to $2,500. If the amount of interest you paid on your student loans in 2018 was $600 or more, you should receive a Form 1098-E (Student Loan Interest Statement) from your lender or loan servicer. Form 1098-E will provide you with the amount of interest you paid. The Student Loan Interest Deduction Worksheet in the Form 1040 or Form 1040A instructions can assist in calculating your deductions.

Student Loan Cancellations and Repayment Assistance

Loan Cancellation

If a loan you must repay is forgiven or cancelled, you must include the amount forgiven in your gross income for tax purposes. There is an exception to this rule in instances of a loan made by a qualified lender. This exception assists you in attending an eligible educational institution. Lenders make these provisions based on particular work capabilities.

Repayment Assistance

If you receive student loan payments from any of these sources, the payments are not considered taxable:

  • Scholarships, Fellowship Grants, Grants, and Tuition Reductions
  • The National Health Service Corps (NHSC) Loan Repayment Program
  • A state education loan repayment program eligible for funds under the Public Health Service Act
  • Any other state loan repayment or loan forgiveness program intended to provide for the increased availability of health services in underserved or health professional shortage areas (as determined by such state).

You may not deduct interest paid on student loans if those payments came through these programs.

Tuition and Fees Deduction

Did you pay qualified education expenses during the year for yourself, your spouse, or your dependents? If so, you may be able to reduce the amount of your income subject to tax by up to $4,000. As with as the student loan interest deduction, you claim the tuition and fees deduction as an adjustment to your income. Therefore, you are not required to itemize in order to claim this benefit. In order to claim the deduction, your modified adjusted gross income can’t be greater than $80,000 (or $160,000 for joint returns). Subsequently, the educational institution may provide you with Form 1098-T. This form provides payments received or billed for qualified education expenses. To claim the tuition and fees deduction, complete Form 8917 and submit it with your Form 1040 or Form 1040A.

We hope you found the above information helpful. We encourage you to be aware of all the possible deductions related to education tax benefits. There are a number of education related tax benefits available. If you think you might qualify, consult the IRS website or Publication 970 for more detailed information and guidance.

Does your January credit card statement have you feeling blue? Find out how personal loans could provide credit relief.

It Happens to the Best of Us

The holidays have come and gone. You may be feeling a bit relieved that all the seasonal hustle and bustle is over. Sure, it may be a bit cold outside. Sure, work is back in full swing. But, things are looking good with your New Year’s resolutions. You’re feeling optimistic and energized.

Then, you receive your January credit card bill. Whoa, the new balance is much higher than you expected. As you go down the list of purchases on your statement you ask yourself, “Did I really spend that much?” You also notice the available credit on your credit card is pretty low. There are some big purchases coming up in your future. You were planning on using your credit card to pay for them. Now, you no longer have enough available credit to pay for everything as planned.

With average credit card APRs over 16%, and many exceeding 20%, you know if you don’t pay your balance in full you’ll be hit with a hefty finance charge, which will be added to your outstanding credit card balance. And even worse, if you’re late making the minimum payment that’s due, you could be hit with a penalty APR, which can be as high as 29.99%.

Personal Loans Could Provide Credit Relief

This is where personal loans could provide credit relief. Unlike a credit card, which is a revolving line of credit, a personal loan is an unsecured loan that doesn’t require any collateral, such as a car or house. Personal loans come with a specific repayment period, usually between 1 and 7 years. Fixed interest rates are more common than variable interest rates, and some lenders will offer you a choice.

The main reason people take out personal loans is to pay off existing debt, such as high interest rate credit cards or loans. Other common reasons include making major purchases, for home improvement projects, for special occasions like weddings, to take a vacation, and to pay off medical bills.

Personal loans can range from as little as $1,000 to as high as $100,000. APRs vary widely among lenders and are based on the borrower’s (or co-signer’s) credit history, annual income, repayment term selected, and type of interest rate chosen. Some personal loans even come with money saving automatic payment discounts and loyalty discounts.

Tip: Some lenders charge upfront fees, which add to the total cost of the loan, so be sure to take that into account before choosing a lender.

A really nice feature for personal loans is how quick and easy the process can be. If you submit a completed loan application, you can receive a decision in a matter of minutes, and if approved, receive funds in your bank account as soon as the next business day, provided your application has no typos or errors.

Now that the holidays are over, you may be suffering from the post-holiday credit card blues. If so, check out a personal loan for credit relief from U-fi From Nelnet’s partner. It just may be what the doctor ordered.

At some point, most of us say, I wish I knew then what I know now. That same sentiment holds true for some college students regarding the financial aid process. After learning about the financial aid process, some students look back and wish they made different decisions.  Being better informed from the start changes how students approach their financial aid and funding options.

Here are five things students wish they knew about the financial aid process while planning for college.

1. It’s Never Too Early to Start Planning and Saving for College

College-bound students and their families often wait to think about the admissions process and financial aid options. Many times, they wait until the student’s junior or senior year of high school. However, students should research schools and possible career options early. Getting started in high school or junior high gives them an idea of which schools are the best fit. Heather, a junior in college, said she drastically underestimated all the costs associated with her education. She didn’t know she needed to rely on student loans as much as she did. Even if you expect a scholarship, keep in mind the total costs you and your family may incur. These costs can have an impact on your long-term planning and financing.

2. Know Your Deadlines and Don’t Miss Them

Braxton is in his freshman year and says he missed out on some state grant money because he waited too long to complete his FAFSA (Free Application for Federal Student Aid). He said if he’d been more aware of his state deadline, he would have applied sooner and likely received money from his state grant program. He also said there were some scholarships that had very early deadlines that he missed. It takes some organization and research to be sure you know all the relevant deadlines for various scholarship and grant programs.

3. You Don’t Have to Figure It All Out on Your Own

The financial aid process can often be confusing to first-time students. Rather than trying to do it all on your own, you can find help. Your high school counselors are great resources. If you have a college or university nearby, they may offer free FAFSA workshops or presentations. They can also help you understand the financial aid process better. If you speak with your high school counselor or someone from a financial aid office, don’t be afraid to ask questions so you’ll be certain you know what you need to do. Although you’ll be doing your first FAFSA as early as October of your senior year, it’s never too early to begin learning everything you need to know. Federal Student Aid at the U.S. Department of Education has a FAFSA4caster that you can use to understand your options for paying for college.

4. You Don’t Have to Accept the Full Loan Amount on Your Award Letter

Once your financial aid application is finalized, your financial aid office sends you an award letter. Your award letter may show different types of financial aid, such as scholarships, grants, and student loans. Colleges usually provide award packages to cover your entire cost of attendance (COA). Your COA includes tuition, books, supplies, housing, etc. However, only borrow what you need, even if you were offered a higher amount. You don’t need to accept the full amount awarded.

Another college student said she assumed she should take the amount offered. At first, she thought the extra money could be a cushion if needed. She admitted she spent frivolously on things she really didn’t need. She forgot her loan was unsubsidized. That means interest accrued on her loan while she was in school. Student loans are a great resource to help pay for school as long as you understand the terms and conditions and only borrow what you need.

5. Don’t Assume You Won’t Qualify for Financial Aid and Skip Completing the FAFSA

Some students and families believe that their income may be too high to qualify for any type of financial aid and simply do not complete the FAFSA. Although you may not qualify for grants, you still need to complete the FAFSA to determine your eligibility for student loans and college work study. Some programs (such as unsubsidized student loans) are not need-based and do not have an income limitation. Also, the FAFSA is free to complete, and you could qualify for some other types of aid. One thing families forget is that if they happen to have a higher income, they may also have multiple children attending college, which is a big factor in determining financial aid eligibility. Factors such as your family income, household size, and the number in your family attending college all help determine your financial aid eligibility.

By planning ahead and thinking about the cost of college early, many of these common scenarios can be avoided. By starting your planning early, you can avoid the “I wish I knew then what I know now” feeling down the road.

If you borrowed student loans to help pay for college, you may not be required to make any payments until after you graduate or drop below half-time enrollment. That sounds like a pretty good deal; no payments and no worries while you focus on your studies. But remember, if you take out a federal Direct Unsubsidized Loan, a federal Direct PLUS Loan, or a private loan, interest accumulates during those months (or years) you’re in school and not making any payments. Here are some ways you can save on your student loans while you’re still in school.

Accruing Interest

Interest that accrues on your student loan will typically be capitalized when you begin repayment. That means any accrued interest during those months you are not making payments is added to the original principal amount of your loan. For instance, if you borrowed a $15,000 student loan with an interest rate of 6% as a freshman and made no payments for the four years you were in school, plus your grace period, 51 months would have passed. In this scenario, when you begin your repayment period, you would actually have a balance of $18,825 when you start repaying your loan 51 months later. That’s because $3,825 in interest (also known as capitalized interest) would have accrued during those 51 months and was added to your original loan amount.

In-School Payments Can Help

Now, let’s say you have a part-time job while you’re in school, working 15-20 hours a week to help with some of your expenses. If you could simply pay around $75 a month toward that $15,000 student loan, you could actually pay all the accruing interest (remember, that’s $3,825 total that would have been added to your loan when your first scheduled monthly payment is due). If you’re able to pay $75 towards your student loan’s accruing interest, the total cost you could ultimately save over the life of a 10-year repayment period would be nearly $1,300.

Example

Paying Interest While In School (No Capitalized Interest) Fully Deferred Payments While In School – No Payments (Capitalized Interest)
Original Loan Amount $15,000 $15,000
Interest Accrued During In School and Grace Period (51 months) $3,825 $3,825
Interest Paid During In-School and Grace Period $3,825 $0
Loan Amount When Entering Repayment $15,000 $18,825
Number of Months of Repayment 120 120
Monthly Payment $166.53 $209
Total Interest Paid on Loan (including any payments during in school and grace period) $8,808.60 $10,080
Total Paid on Student Loan (original loan amount plus interest) $23,808.60 $25,080

As you can see from this example, making interest payments while you’re in school and during your grace period can help you save on your student loans down the road. Plus, making payments during your in-school and grace period also gets you in the habit of making payments on your student loan and better prepares you for successful repayment. Remember, this is just an example of borrowing one loan during your freshman year of college. Imagine what the capitalized interest could look like if you borrow each year of college, or what your savings would be by making continued interest payments while you’re in school. You can learn more ways to save on your student loans and get additional helpful information by visiting our student loan resources.

If you graduated from college this year, you may realize just how much student loan debt you have. With the average student loan debt at around $29,000 per student, it can be overwhelming to see that number and you may wonder how you are going to pay it back. Well, take a deep breath: you have several options when it comes to repayment. Don’t hesitate to give your student loan servicer a call because they will help you work through your options. Or, you can also follow these 4 steps to get ready for student loan repayment. It’s important to investigate your options and be prepared. It’s equally important to know a few things you should avoid.

Deferment & Forbearance

Deferment and forbearance allow you to temporarily postpone making payments or can reduce your payment for a period of time. Sounds great, right? So, what’s the problem? Your student loans continue to accrue interest. That interest could cost you thousands of dollars a year, depending on your student loan debt. Don’t delay the inevitable. You will have to pay back your student loans whether you pay them now or pay them later. Deferment and forbearance are great options if you have no financial means when you enter repayment. However, you shouldn’t use them as a way to delay paying your student loans. If you do need to go this route, try to at least make interest payments on your loans. If you don’t, the interest will capitalize leading to higher student loan debt and higher monthly payments once your deferment or forbearance expires.

Don’t Miss Payments

Make your payments every month and on time. If a loan payment is not made by the due date, the loan becomes delinquent until payment is received. Depending on your servicer or lender, this delinquency can affect your credit report as a negative mark, therefore negatively affecting your credit score. In addition, when you miss monthly payments, your payment will double, then triple, and continue to snowball which may put you in a situation that’s difficult to catch up on.

Avoid Scams

We’ve all heard the saying, “if it sounds too good to be true, it probably is.” It may seem enticing to pay a company to handle the stress of your student loans and promise you low payments or loan forgiveness, which are why these companies exist, but you’ll be wasting your money. Student loan servicers and lenders will not charge fees for finding a repayment plan that fits your needs. The U.S. Department of Education offers several student loan repayment plans and loan forgiveness, cancellation, or discharge for certain circumstances, but all of their services are free of charge.

Being prepared for repayment and understanding what you should avoid are two big steps to successfully paying off your student loans. Just remember, your student loan servicer is there to help you. If you need to adjust your repayment plan or just have questions about your student loans, give them a call (844.307.3451).

You may have heard about private student loans. Some information about private loans is like a Bigfoot sighting. There are a lot of stories, but they often aren’t based on facts. In this article, we’ll look at each private loan myth and give you the facts.

Private Loan Myth #1: Private Student Loans Only Offer Variable Interest Rates

One of the most common myths about private student loans is that they’re only available with riskier variable interest rates. In reality, most private loan providers offer borrowers a choice between a fixed interest rate and a variable interest rate. Depending on your individual circumstances, one may be more appealing than the other. Read more about choosing a variable or fixed interest rate to see what important factors should be considered when choosing your type of interest rate. Additionally, highly qualified borrowers can likely find private student loans with low interest rate options.

Private Loan Myth #2: Private Student Loans Have High Origination or Application Fees

The reality is that most private loan providers currently charge NO upfront fees, also known as origination or application fees. There is no fee to make extra payments or to pay off loans early. Although most loan providers offer loans with no upfront fees, research your options. Be sure to verify any fees or charges associated with loan products.

Private Loan Myth #3: Private Student Loans Require Immediate Repayment While You are Still in School

As a borrower, you have various repayment options offered by different private loan providers. Most lenders have an option to delay or postpone payments while enrolled at least half-time. They also offer a six-month grace period following your graduation or last date of at least half-time enrollment. This gives you the option to not make payments while enrolled in school as long as you are enrolled on at least a half-time basis. This can give you some added flexibility while you are focused on your studies. However, if you can make payments in school, even if only the accruing interest, you can save money and keep your loan costs lower. You can find additional ways to save money on your student loans here.

Private Loan Myth #4: Private Student Loans Have No Deferment or Forbearance Options if You Have Difficulty Making Payments

Most lenders offer options to postpone payments if you encounter some type of financial hardship. (You may want to check to be sure.) Most private loan lenders provide a hardship forbearance to temporarily postpone payments if you find it difficult to make payments.

Many private loan lenders also offer deferments. Deferments can postpone payments for certain circumstances. These circumstances include returning to school, having an internship or residency, or during other approved events. Again, check with your private loan lenders to see what options are specifically available.

Private Loan Myth #5: Federal Student Loans are Always Cheaper than Private Student Loans

As a general rule, explore your federal student loan options first before taking out any private loans. Federal student loans will typically provide you a greater degree of flexibility with repayment options and various forgiveness provisions. You can read a good overview of federal and private student loans here.

However, many private student loans can have interest rates as low as or even lower than federal student loans. Federal student loans also have a nominal origination fee charged to borrowers. As discussed earlier, most private loans do not have any origination or application fees. Several lenders now offer private loans designed specifically for parents for their students’ educational expenses. Parents find these loan options often have lower interest rates compared to federal Parent PLUS loans.

We hope you have a better understanding of private student loans and are better equipped to make informed decisions regarding your education financing options. Research your options to find what works best for your individual circumstances and don’t believe every myth you hear. But, if you happen to see Bigfoot in the cafeteria on campus, snap a pic. You just might be able to sell it and pay off your student loans!

If you’re getting your first student loan or credit card, you’re likely seeing some terms you don’t recognize. A key component of being an informed consumer is understanding all those financial terms. You’ve probably heard an announcer at the end of a TV commercial speed-reading through a bunch of legal terms. We’re going to slow it down and lay out the most important terms you need to know.

Accrue

This is the act of interest accumulating on your principle balance.

Annual Percentage Rate (APR)

APR is a more accurate reflection of the total annual loan cost. It includes the actual interest rate, plus any other incurred charges or fees (such as upfront origination fees). You can find more information about interest rates and APRs on our website.

Capitalization

Capitalization means adding unpaid accrued interest to the principal balance of a loan. This increases the amount of your monthly payments and the total amount repaid over the life of the loan. You can choose to pay the interest as it accrues to reduce or completely avoid the cost of capitalization. The more frequently interest capitalizes, the more you wind up paying.

Cosigner

A cosigner or co-borrower is an individual who signs the loan promissory note with you. They are equally responsible for repaying the debt. Having a cosigner can often help you qualify for a better interest rate. This is especially true if you don’t have established credit or sufficient income. This article further outlines the potential benefits of having a cosigner.

Compound Interest

Compound interest is interest calculated on the principal loan amount, plus any interest accrued during previous periods. For example, if interest is compounded monthly, you would then pay interest on the interest that accrued in the previous month, as well as the outstanding principal. Compound interest can drive up your total cost of paying off debt.

Credit Bureau

A credit bureau is an agency that collects personal and financial information from various sources about consumers. The agency retains information about the types and amounts of credit you have obtained as well as your timeliness in making payments. Your credit card companies and the various lenders which have made loans to you report this information to the agency.

Credit Score

A credit score is a number, generally between 300 and 850, provided in a credit report and used by a lender as a predictive indicator of your likelihood to repay a loan. The credit score may be used by the lender to determine eligibility and set the terms of a loan, such as the interest rate and fees. The higher the credit score, the better. Higher scores will generally allow you to receive better interest rates. Check out our article on understanding your credit report for more detailed information.

Default

The failure of a borrower to repay a loan according to the terms of the promissory note is a default. For federal student loans, default occurs at 270 days delinquent and has a negative effect on your credit score.

Delinquency

Failure to make payments when they are due is referred to as delinquency. Delinquency begins with the first missed payment. Missed payments or delinquent payments will negatively impact your credit score, so make sure you stay current on all payments.

Finance Charge

The total amount of interest that will be paid over the life of a loan when the loan is repaid according to the payment schedule is the finance charge.

Fixed Interest Rate

A fixed interest rate is an interest rate that remains the same for the duration of the loan or credit obligation.

Interest

This is an amount, calculated as a percentage of the principal loan amount, that lenders charge for borrowed money.

Interest Rate

The interest rate is the rate at which interest is calculated on your loans or credit card balance.

Minimum Monthly Payment

The smallest monthly payment amount that can be made in order for a loan account to remain in a current repayment status is the minimum monthly payment. For a credit card bill, you’ll find that paying more than the minimum monthly payment will help you pay your balance faster and likely help you avoid potential rate increases on your credit card.

Origination Fee

The fee you pay and deduct from the principal of a loan prior to disbursement is the origination fee. For federal loans, you pay this fee to the federal government to offset the cost of your interest subsidy. For private loan programs, you pay the origination fee to the lender to cover the cost of administering and insuring the program.

Promissory Note

The promissory note is the binding legal document you sign for a loan, which lists the terms and conditions of the loan as well as your rights and responsibilities. For federal student loans, another name for the promissory note is the Master Promissory Note (MPN).

Simple Interest

Simple interest is interest only calculated based on the principal amount of the loan.

Truth in Lending Disclosure

This disclosure is a statement lenders provide to you prior to or at the time of disbursement of a private loan that lists the lender name and contact information, amount financed, annual percentage rate (APR), finance charge, payment amount and schedule, and total repayment amount.

Variable Interest Rate

The rate of interest charged on a loan changes periodically (monthly, quarterly, or annually) and fluctuates with a stated base index (such as the Prime Rate or a LIBOR index) is a variable interest rate. The variable interest rate fluctuates as the base index changes. So, your monthly payment amounts will increase or decrease depending on if interest rates rise or fall.

Now you have a basic understanding of some of the common financial terms and how they impact you as a consumer. Remember, always make sure that you understand all of the terms and conditions when you take out student loans, open a new credit card account, or take on a new loan of any kind. Reputable companies will be happy to answer any questions you have so that you have a clear understanding of your financial obligations.

If you have received your financial aid award and still need money for college, private loans may be worth considering. Banks, credit unions, and other lending organizations offer private loans.

First Steps for Private Loans

You take out private loans in your own name. They often require you to apply with a qualified cosigner who has an established credit history. Even if you don’t need a cosigner, using one may still help you obtain a better interest rate. Lenders provide the best rates to borrowers and cosigners with the strongest credit qualifications.

As a general rule, private loans should be the last financial aid option. Always file the Free Application for Federal Student Aid (FAFSA) first, and accept any grants, scholarships, work-study and federal loans offered by your school before taking out a private loan. Federal loans offer more repayment options, income-based programs, and in some cases, loan forgiveness alternatives.

If you decide a private loan is right for you, consider these things when selecting a program.

1. Check to see if your college has a recommended lender list.

Some schools investigate private loan programs and providers on behalf of their students. They provide lists of those they think would best meet their students’ needs. If your school has a list, you can begin there. Your school generally posts school lender lists on their financial aid website. In many cases, the website links you to a third party where your school provided a list of programs. In either case, loan programs are usually listed by feature, so you can compare to see which might best meet your needs. If your school does not have a lender list, you can investigate Credible or other websites which will provide loan program options and help you compare features.

2. Decide which features are the most important to you.

  • Rates – In comparing interest rates, you will see some lenders use an index called London Interbank Offered Rates (LIBOR), and others use the Prime Rate index. Since they aren’t the same, look at the loan programs’ Annual Percentage Rates (APRs). The lowest and highest APR ranges are be displayed. If APRs aren’t listed, be aware that the Prime Rate is typically two to three points higher than LIBOR. The most current rates can be located in the Federal Reserve’s Statistical Release.
  • Fees – Most private loan lenders offer zero application and origination fees. Check all loan programs you are considering to make sure this is true and to determine if there are other fees associated with the loan.
  • Repayment plans and terms – Would you prefer in-school interest payments to keep your costs down? Perhaps multiple repayment period choices like a 5, 10, or a 15 year period are best for you. With private loans, you choose your repayment period at the time you take out your loan. You may also want to check to see if there are deferment or forbearance options if you run into difficulty in repayment.
  • Cosigner release – Your cosigner is responsible for making payments if you do not. The cosigner’s credit report reflects any late or missed payments as well. When investigating options, determine if the program offers a cosigner release, how many payments you will need to make before that is possible, and how involved the release process is.
  • Borrower benefits – Lenders offer a variety of benefits like interest discounts for auto-debit payments, cash back for achieving certain grades, or interest reductions after a specific number of on-time payments. Be sure you determine which are the most important to you and take the required action to meet the requirements.

3. Understand the difference between fixed and variable rates.

As you compare differences between programs, interest rates may be a primary factor. You will need to decide between fixed rates, which may be higher at first but remain the same throughout the life of your loan, or variable rates which may be lower at first but change periodically based on fluctuations in the economy. For more information about the factors to consider before making this decision, go to U-fi From Nelnet’s frequently asked questions.

4. Your rate is the one that matters most.

Lenders may advertise low rates when they share their program’s interest ranges, and many students assume they will receive the lowest rates. See if lenders allow you to use a calculator. If you can enter general information about you and your cosigner, you may be able to obtain a preview of what your interest rate will be before completing the application process and providing authorization for your credit to be pulled.

Private loans can provide a solid financial option for students who need help bridging the gap between financial aid and college costs. Be sure to first research programs fully and understand your responsibilities before taking out any type of education loan. If you have questions, your college financial aid office is the best source of information and guidance about your individual situation.

Thinking about applying for a new private student loan, or refinancing your existing federal and private student loans? Expect the lender to check your credit history and credit score. They do this to ensure you are not a credit risk. You can proactively take steps to improve your credit health and raise your credit score. Start with understanding what’s in your credit report, and what student loan lenders are looking for.

What is Credit?

Have you ever taken out a student loan or credit card? If so, you entered into an agreement to receive funds that must be paid back later. Unlike credit cards, student loans are repaid in installments over a set number of payments. This term is usually 5 to 25 years.

When you take out a student loan, most lenders or servicers notify at least one of the three major credit reporting agencies. These are Equifax, Experian, or TransUnion. They do this so they can include the new account on your credit report as a trade line. Each trade line contains detailed information. This information includes account name and number, loan type, date opened, original and current balance, payment status, and monthly payment.

The lender or servicer notifies the credit agencies of all loan activity. This activity includes payment date, amount of payment applied to principal and interest, and timeliness of payments. The credit agency records this information, which makes up part of your credit history.

Understanding Your Credit Report

While each credit reporting agency’s reporting format may be slightly different, they essentially include the same information:

  • Personal Information, such as your name, address (current and previous), Social Security number, date of birth, and other information that identifies who you are.
  • Credit History, including your open and closed accounts, original loan amounts, current balances, and payment history.
  • Public Records, such as delinquent accounts, liens, and bankruptcies. Public records can remain on your credit report for many years, which will affect your ability to obtain future credit.
  • Credit Inquiries, which are placed on your credit report when you request credit. Credit inquiries remain on your file for two years.

Tip: Federal law entitles you to a free copy of your credit report each year from all three credit reporting agencies. Take advantage of this and check your report from each credit bureau annually. This ensures your personal information is accurate and up to date. To get a free credit report, visit www.AnnualCreditReport.com or call 877-FACTACT. If something on your report looks inaccurate, be sure to contact the credit agency immediately to have it addressed. Unfortunately, the credit reports will not include your credit score.

What Student Loan Lenders Look For When Checking Your Credit

When making a credit decision, private student loan lenders check your credit report and credit score. They do this to determine whether you are an acceptable risk, and what interest rate they should charge you. If you have a cosigner, lender checks their credit report and credit score too.  Most lenders, like U-fi From Nelnet, will want to see an adequate credit history, a track record of making on-time payments, how much debt you have outstanding, and a good credit score. Lenders also ask how much income you have to determine whether you, or your cosigner, have enough monthly income to make monthly payments.

To increase your chances of being approved and receiving a low interest rate for a new student loan or a student refinance loan, you and/or your cosigner will want to have at least two open trade lines, be no more than 30 days past due on more than one account, and have no public records for the past five years. Most lenders will also want to see a good credit score. While each lender is different, if you have a credit score above 700, you will generally be considered a good credit risk.

Tip: When shopping for a private student loan or student refinance loan you should complete all your applications within a short window (e.g. 30 days), since multiple credit inquiries within a brief time period will have little impact on your credit score.

How Does Your Credit History Affect Your Credit Score?

Your credit score is a number that summarizes your credit risk at any moment in time. While there are several types of credit scores, 90% of lending decisions use a FICO score. Fair Isaac Corporation creates the FICO score. FICO scores range from a low of 300 to a high of 850, with higher being better. FICO scores are made up of the following:

  • 35%: Payment History – have you made your past payments on time?
  • 30%: Amount Owed – how much debt do you owe and how much of your available credit has been used?
  • 15%: Length of Credit History – how long have you been using credit?
  • 10%: New Credit – how much of your debt has been opened recently?
  • 10%: Types of Credit Used – do you have different types of credit such as credit cards, installment loans, and mortgages?

Tip: FICO scores can change from month to month due to several factors. Not having too much debt, and making full payments on time, over a long period gives lenders more confidence you will repay them. That increases the likelihood they will extend you credit at a lower interest rate.

Understanding what’s on your credit report and how it impacts your ability to get a good credit rate is extremely important. If you notice something incorrect on your credit report, call the credit agency immediately. Work with them to correct any problems. A better credit history and higher credit score means a better shot at approval and a low interest rate. Your credit could save you a lot of money on your student loans. It can also ensure additional credit is there for you when you need it most.