Looking for savvy ways to finance your education? Then it's time to go shopping and look at a range of loan options that are available. As interest rates on federal college loans rise and shift to fixed rates, it's more important than ever to accurately calculate the cost of your education, consider all of your financing options and knowledgably select the ones that will be cheapest over time. Here's how to do it:
A popular mistake students make when it comes to college loans is not knowing all their options. The challenge seems so daunting, that most students take the first loan option they're offered.
But as of July 1, 2006 federal college loans, which were previously based on market rates, have moved to fixed interest rates. For the PLUS loan, that means an interest rate of 8.5 percent, and for Stafford loans, 6.8 percent. If market interest rates go down, private loans may become a better option.
Even if federal loans remain the best deal, the cost of education is so expensive that most students need to supplement the federal loans they're offered with private ones. In this case, the loans which a university recommends may not be the cheapest financing option available.
A recent '60 Minutes' investigation revealed that some universities offering students particular financing options were receiving kickbacks from the organizations financing the loans. To make sure you're getting the cheapest interest rate, investigate all of your options, including loans recommended by your school and those available from other sources.
Choosing the Cheapest Rate
It may sound obvious to recommend choosing the cheapest financing option available, but often students do not react positively to it considering loan security. A lot of students will select private loans because the student has the obligation for repayment, even though prior to the change in rates PLUS loans were cheaper.
But, even if the loan is technically in your name, most loans require a parent co-signer. Either way, parents are on the hook, so better to go with the cheapest deal. Remember that tuition costs are likely to rise each year, so multiplying the cost of tuition for your freshman year by four won't work.
When looking at private loans, take into account all of the costs associated with them - such as origination fees and the ways in which interest will compound over time and be sure that you're comparing the lowest rate that you will qualify for with each organization, which may differ from the lowest rate on offer based on factors such as your credit.
If federal rates remain the cheapest option, being savvy can help you save. Once you have been in school for two years, consolidate your PLUS loan every year. Although the PLUS loan is now fixed at 8.5 percent, the maximum interest rate for consolidated loans is capped at 8.25 percent. By consolidating, you'll save a quarter percent. You'll lessen the amount of dough that the government believes you can afford to spend on college, known as your Expected Family Contribution, or EFC, on the Free Application for Federal Student Aid (FAFSA) - by limiting the amount of money in your name on bank and other accounts.
While the government looks at 35 percent of your own assets in considering your ability to pay for college -- a number that will change to 20 percent on July 1, 2007 -- the maximum they will consider is 6.4 percent of your parents' assets. So spend your own money first.
Every Bit Counts
While you may not be able to pay much while in school could be the reason for the loan, but small efforts like this can amount to a big difference over time.
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