Applying for a student loan can be overwhelming. From interest rates to loan amounts, there are several factors you need to consider when looking for student loans for college. The most important of these is knowing how to compare student loan rates.

Why It’s So Important to Know How to Compare Student Loan Rates

The rate of interest that you pay on your student loans will determine how much your loan costs you. The aim is to get a loan with the lowest interest rate to save money. The lower the interest rate you pay, the lower the cost of the loan and the more you save. Even one percentage point difference in the interest rate can save you thousands of dollars in accrued interest over the life of the loan.

Knowing how to compare student loan rates is the key to snagging the lowest interest rate on your student loans. Comparing different lenders and their rates can be time-consuming and tedious. But this is time well spent when you consider how much you could potentially save.

Before you start researching lenders, here’s what you should know about the interest rates on different types of student loans.

Comparing Interest Rates on Federal Student Loans Vs Private Student Loans

College students have access to two types of loans – federal and private student loans. Both work very differently from each other. Their interest rates are calculated differently too.

What you should know about federal student loan interest rates:

  • Federal student loans are low-cost loans offered by the federal government. Every year, the federal government sets the student loan interest rate for that academic year. This rate remains the same for that particular year. It may increase or decrease the following year when the federal government sets a new rate based on market conditions.
  • When taking federal student loans, you don’t need to compare student loan interest rates. All students who apply for federal student loans during any one academic year pay the same interest rate.
  • Taking federal student loans should be your first priority. These loans have much lower interest rates as compared to private student loans. But, there’s a limit to how much you can borrow from the federal government each academic year. If you need additional funds to cover you college tuition, you’ll need to apply for a private student loan.

What you should know about private student loan interest rates:

  • Interest rates on private student loans are much higher than interest rates on federal student loans.
  • Unlike federal student loans, every student pays a different interest rate on the money they borrow. This is because private lenders calculate personalized interest rates for every applicant based on their financial credentials.
  • Every private lender uses their own method to calculate personalized interest rates. This means the interest rate that’s quoted to you could vary considerably from one lender to another. This is where knowing how to compare student loan interest rates can help you find a loan with the lowest possible rates.
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How To Compare Student Loan Rates Among Private Lenders

Start by shortlisting private lenders that offer student loans. You’ll see that all lenders that offer student loans have their interest rates published on their websites. Ignore these rates for now. These published rates are the lowest rate the lender offers but those rates are only relevant to borrowers with an excellent credit score. Most students wouldn’t have had the opportunity yet to build their credit and are not likely to qualify for that rate.

Focus instead on each lender’s eligibility criteria. Shortlist only those whose requirements you meet. Most private lenders will require you to meet all of these criteria:

  • Be enrolled in an eligible institution
  • Plan to use the funds for educational purposes
  • Meet age, citizenship and education requirements
  • Meet minimum income and credit requirements

If you don’t meet all of these requirements, some lenders will allow you to apply for a loan with a cosigner. A cosigner is any individual who shares responsibility of the loan with you. This could be a parent, sibling, friend, or anybody else who meets all of the lender’s borrowing requirements.

Once you’ve identified lenders that are a good fit, it’s time to compare student loan rates to find the lender offering the lowest-cost loan.

Comparing Interest Rates Only Is a Mistake

Many students rush into choosing a lender offering the lowest interest rate. This could be a mistake. Some lenders offer rock-bottom interest rates to entice potential borrowers. They can offset these low rates by adding on hidden fees. These may be in the form of application fees, origination fees, or steep penalties.

When you find a favorable lender, always go through their terms, conditions, and fee schedule thoroughly. Pay special attention to the fine print. This is where their additional fees will be mentioned.

Don’t see anything about hidden fees in the fine print? Don’t presume there are no fees because you didn’t find any mention of them. Call the lender and ask them. They are legally obligated to inform you about the fees they charge. These fees add to the cost of your loan and could increase the loan cost substantially.

Before you sign any loan agreement, in addition to comparing student loan rates, make sure to also calculate the total cost of the loan. This will help you make more realistic comparisons and find the right student loan for you.