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Student Loans Interest - Finding the best interest rates on student loans

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The trick to managing your student loan debt after graduation may be taking the time to research interest rates on student loans while you are still in college.

Many students are so overwhelmed by their college work load that they don’t take the time to investigate student loan interest rates before choosing a lender. However, the savvy student knows that even a small difference in interest rates can have a huge impact on the monthly payments you will owe later, so it’s good to study your options now.

Your first step in seeking a student loan should be filling out the Free Application for Student Federal Aid (FAFSA), which can be accessed at http://www.fafsa.ed.gov. The FAFSA is used to calculate your Expected Family Contribution based on your family’s income and to determine your eligibility for federal loans or other aid. The low-interest rates offered for federal student loan programs typically are far more desirable than those offered by private lenders.

Federal Perkins Loans are available through some universities for undergraduate and graduate students with exceptional financial need. These low-interest loans are funded with federal money distributed by your school, and the loans must be repaid to your school.

Low-interest Federal Stafford Loans are available for undergraduate and graduate study. Students must demonstrate need in order to receive a subsidized Stafford Loan, and student borrowers are not responsible for interest on these loans. Unsubsidized Stafford loans are available to students who do not demonstrate financial need, and these borrowers must pay interest on the loans. For both of these loan programs, payment on the principle is deferred while you are attending school at least half-time.

The FAFSA website makes it possible for students to estimate what their federal loan payments will be after graduation. Type your interest rate and your loan amount into the loan calculator form at the website: http://studentaid.ed.gov/PORTALSWebApp/students/english/OtherFormsOfRepay.jsp.

If your family is willing to help finance your schooling, low-interest Federal PLUS Loans are available to parents of student dependents who are enrolled at least half-time in undergraduate, graduate or professional degree programs. These loans do not require borrowers to show financial need, but parents must not have an adverse credit history. Borrowers must pay interest on the loans.

Unfortunately, many families aren’t willing or able to take on that type of loan burden, and the amount of federal loan money available to individual students each year is capped. As a result, many students find they must seek other alternatives to finance their education, including private student loans with higher interest rates.

Private student loans have several disadvantages over federal programs. Lenders may require private loan borrowers to make payments while they are still enrolled in school. Federal student loan interest rates are fixed, but private loans often offer variable rates which can increase over the course of the loan. Private student loans’ interest rates also can be much higher than federal loans, reaching over 18 percent interest in some cases. Private loan interest rates are generally linked to either the LIBOR (London Interbank Offered Rate) or the Prime Lending Rate indexes. Lenders will report their rates as LIBOR plus a percentage or PRIME plus a percentage.

If you do your homework, you can improve your chances of getting a better student loan interest rate:
• Compare interest rates and terms. Many lenders have websites or hotlines where you can get information about their current rates. Be sure to ask about loan fees, which can make a loan with an attractive interest rate cost much more than anticipated. Compare the terms for repayment. Ask if payments can be deferred and if there is a penalty for paying early. Some online sites such as http://www.finaid.org offer comparative lists of lenders’ interest rates as well as calculators to estimate loan payments based on your interest rate.
• Obtain a credit-worthy co-signer. Many college students have not yet established a favorable credit rating. Asking a credit-worthy parent to co-sign your loan can make a big difference in your student loans’ interest rate.
• Pay the interest on the loans while you are still in school if the loan terms allow this. In the long run, you will find that this results in smaller monthly payments after you graduate.

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