to the old promissory notes you signed while still in college.
Many borrowers don’t know the difference between federal loans and private loans, mistakenly thinking that “a loan is a loan.” But that’s not the case. For starters, private loans are usually more costly. “I would take the stance of ‘buyer beware’ with private loans, because private loans have variable interest rates,” says Marc Woolf, an expert on student lending. “Obviously one has to find out what sort of vehicle it’s tied to. Is it LIBOR [the London Interbank Offered Rate, an interest rate at which banks can borrow], increases in the federal funds rate, or something else?”
Federal loans, on the other hand, have government-imposed caps on their interest rates, which are fixed, currently at 6.8% for Stafford Loans. Private loans have variable interest rates and now average 10%, according to Robert Shireman, head of the Project on Student Debt (www.projectonstudentdebt.org).
Another key difference: many federal loans, such as Stafford loans, are subsidized, which means that while you’re in school, the government pays the interest on your loans. Private loans have no such subsidy. As a result, if you don’t pay the interest on your loans while you’re in school (and more than 90% of students don’t), the interest accrues and gets capitalized, or added to the original loan balance. By the time the typical student graduates, thousands of dollars in interest have been tacked onto his or her college debt.
Negotiate Your Rate
Every July 1, Congress adjusts the interest rate caps charged on federal student loans. The feds don’t set the rates, however; they impose a maximum or “cap” interest rate that lenders can charge. Lenders then set their own rates based on what the market will bear. If you’re willing to negotiate and ask for more favorable rates and loan terms, you’ll find many lenders will agree to charge a rate lower than the federal maximum interest rate. Negotiate lower rates for:
Having payments automatically deducted from your checking or savings account
Making a set number of on-time payments (24 to 48 months of on-time payments often qualifies you for a rate cut, and a few lenders will give you a break even sooner. For example, one national student loan company called MyRichUncle (www.MyRichUncle.com) offers borrowers an up-front interest rate cut of up to 1.75% as soon as they begin repaying their loans–not years later.
Earning good grades, or qualifying for any other incentives a lender offers. By negotiating your student loan interest rate, you can save yourself lots of time and money.
Bite the Bullet Now
To eliminate student loan debt as fast as possible, a key question to ask is: how much will I pay over the life of my loan or loans? Trying to figure out how much you’ll pay in interest over 10, 20, or 30 years can be tricky.
Begin by checking out the free online college loan calculators provided by FinAid at www.finaid.org/calculators. These calculators help you figure out how much money you’ll fork over, in principal and interest, for