Ask Cappex: The Best Student Loans for College Freshmen

on August 12, 2016

Our college expert Mark Kantrowitz answers your questions about college and financial aid.

Q: I have a question about student loans. What student loans are best for a freshman starting college? What are the options?

A: Before borrowing money for college, take advantage of free money first. Search for scholarships on free scholarship matching services, such as the Cappex college scholarships search tool, and file the Free Application for Federal Student Aid (FAFSA).

If you can afford to pay the college bills, just not in one big lump sum, consider using a tuition installment plan. Tuition installment plans split the college bills into 4-12 equal monthly installments. Tuition installment plans do not charge interest, but there’s usually a small, up-front fee, typically less than $100. Tuition installment plans are a good way of avoiding more expensive, long-term debt.

The best student loans are low cost with fixed interest rates, low or no fees and flexible repayment terms.

Borrow federal first. Federal student loans are among the least expensive. They also offer longer deferments and forbearances than private loans, loan forgiveness options, death and disability discharges, and several repayment plans. Federal student loans include the Federal Perkins loan, subsidized Federal Stafford loan and unsubsidized Federal Stafford loan. Not only do these loans have low, fixed interest rates, but the federal government pays the interest on subsidized loans during the in-school and grace periods. While subsidized loans are limited to borrowers with financial need, unsubsidized loans are available even to wealthy students. To be eligible for a federal student loan, borrowers must be enrolled on at least a half-time basis, but do not need to have good credit.

Borrowers who reach the federal student loan limits may need to use the Federal Parent PLUS loan, private student loans or private parent loans. But, needing to borrow parent or private loans may be a sign that you are over-borrowing. If total student loan debt at graduation exceeds your annual starting salary, you will struggle to make your monthly loan payments and will need an alternate repayment plan, like extended repayment or income-driven repayment, to afford the monthly loan payments. If total student loan debt at graduation is less than annual income, you can afford to repay your student loans in ten years or less.

The Federal PLUS loan offers better benefits than private loans, such as a deferment while the student is enrolled in college and an extended repayment plan. However, borrowers who have very good or excellent credit may be able to qualify for a lower interest rate and fees on a private student loan or private parent loan. Most private loans base the interest rate on the credit scores of the borrower and cosigner (if any). They do not provide up-front pricing, so you’ll need to apply for the loan before you can learn your personalized interest rate. Shop around to find the best rate.

Be careful about comparing variable interest rates with fixed rates. A variable interest rate may initially be lower, but can increase a lot, ultimately yielding a more expensive loan. Variable interest rate loans are best for borrowers who will be paying off the loan in full before the interest rates increase too much.

Both federal and private student loans are eligible for the student loan interest deduction. This is an above-the-line exclusion from income for up to $2,500 in student loan interest. You can claim the deduction even if you don’t itemize. Federal education loans and most private loans offer an interest rate reduction for borrowers who sign up for auto-debit, where the monthly loan payments are automatically transferred from the borrower’s bank account to the lender.

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