THINGS TO KNOW WHEN SHOPPING FOR STUDENT LOANS BROUGHT TO YOU BY

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1 10 THINGS TO KNOW WHEN SHOPPING FOR STUDENT LOANS BROUGHT TO YOU BY The College Ave Team

2 WHAT S INSIDE 4 UNDERSTAND HOW LENDING (AND BORROWING) WORKS 5 THERE ARE TWO TYPES OF STUDENT LOANS: FEDERAL AND PRIVATE 7 KNOW THE DIFFERENCE BETWEEN VARIABLE AND FIXED INTEREST RATES 9 ALL LOANS ARE NOT CREATED EQUAL 10 MAKING PAYMENTS WHILE IN SCHOOL REDUCES THE TOTAL COST OF YOUR LOAN 11 DON T WAIT UNTIL THE LAST MINUTE TO GET A STUDENT LOAN 12 UNDERSTAND THE IMPORTANCE OF CREDIT SCORES PRIOR TO APPLYING 13 YOU WILL LIKELY NEED TO APPLY WITH A COSIGNER 14 LOOK OUT FOR ORIGINATION AND DISBURSEMENT FEES OR PREPAYMENT PENALTIES 15 DON T FORGET ABOUT THE AUTO-PAY DISCOUNT 2

3 Hi! Let us take a guess...you re an 18-year old who graduated high school a few weeks ago, accepted an offer to go to your dream school, and is making a list of all the dorm-room necessities to buy at Bed Bath & Beyond. Or maybe you re a seasoned vet at this point, preparing to go into your last year of college, working at your summer internship, thinking about what the next step in your journey is going to be. Or maybe you re a parent sending your first child off to college, worrying about not only the little things like whether they can handle their own laundry and grocery shopping but also the big things like how to pay the tuition bill. No matter which one fits you best, there s no doubt it can be a stressful time of year. On top of all the other things to worry about when going off to college (or sending your kids off to college), many people are also confronted with the dilemma of figuring out how to pay for college. This often leads to researching student loans, which can be complicated and confusing. But it doesn t have to be. At College Ave Student Loans, we believe in simplifying the process and presenting the information in a way that s easy to understand. To get you started, we put together a list of important things to know as you research student loans. Best of luck, The College Ave Team 3

4 1 UNDERSTAND HOW LENDING (AND BORROWING) WORKS Learning how lending works is not only important while you re in college and looking for student loans but also for life in general. While the nitty-gritty details of lending may vary depending on the type of loan you re seeking (student loan, car loan, mortgage, etc.), the general principles can be applied across the board. In the most basic sense, lending is the act of giving money to someone now with the expectation they will pay you back in the future. Usually, lenders are reimbursed by ongoing, monthly payments made by the borrower until the total amount owed is received. In return for lending the money, the lender charges the borrower a percentage of the amount borrowed, which is known as an interest rate. In general, the lender determines the interest rate, and it reflects the likelihood that the borrower will repay the amount owed on time. Lenders use different ways to calculate interest rates, but typically an individual s credit score has a lot to do with it since that s how the lender predicts an individual s ability and likelihood to pay (higher credit score = lower interest rate). Note: federal student loans do not exactly work this way. More on that later. LET S LOOK AT A SIMPLIFIED EXAMPLE. You (borrower) need $5,000 (loan amount) to cover the remaining balance of your tuition, so you go to your favorite uncle, Uncle Rick (lender), to ask for the money. Uncle Rick says sure, but he also says he ll charge you 5% a year (interest rate) in return for lending you the money, and all of the money must be repaid in 10 years (repayment term). While getting into the details of lending can be complex, the basic principles are fundamentally simple. Don t let the big words or sophisticated calculations confuse you! 4

5 2THERE ARE TWO TYPES OF STUDENT LOANS: FEDERAL AND PRIVATE And it s important to the know the difference. For starters, federal student loans are student loans made and funded directly by the federal government, whereas private student loans are loans made and funded by private lenders and banks. FEDERAL STUDENT LOANS There are a few types of federal student loans, and they are awarded based on set eligibility criteria. The main federal student loans break down as follows: The DIRECT SUBSIDIZED LOAN is available to undergraduate students with financial need, and they are not responsible for paying the interest charges on the loan while in school. The DIRECT UNSUBSIDIZED LOAN is available to undergraduate and graduate students who meet the eligibility requirements, but there is no requirement to demonstrate financial need. The DIRECT PLUS LOAN is available to eligible graduate students and parents. All federal student loan interest rates and fees are set at the start of the academic year and remain fixed for the life of the loan. Federal loans come with a standard repayment schedule and offer a wide range of repayment assistance options. To apply for federal student loans, students must complete the Free Application for Federal Student Aid (FAFSA). For help filling it out, check out this step-by-step guide 5

6 PRIVATE STUDENT LOANS The following pages will take an in-depth look at private student loans, but in general, private student loan offerings will vary by lender, including the interest rates and repayment options. To apply for private student loans, students must complete an application with each lender individually or use an aggregator like Credible to submit an application with multiple lenders at once. The time it takes to apply can vary depending on the lender. At College Ave, you can apply and get a credit decision in as little as 3 minutes. WHAT S THE DIFFERENCE? Aside from who is issuing the loan, the biggest difference between the two types of loans is the eligibility criteria. Federal student loans do not screen creditworthiness (or the ability to repay), whereas private student loans often include a credit and income review to determine the borrower s anticipated ability to pay. When figuring out how to pay for school, it s typically recommended that a student start with filling out the FAFSA and exhausting their federal direct unsubsidized and subsidized loan options first. There are limits to how much you can borrow through those programs though. If you still need additional funds, and you (or a cosigner) have a strong credit history, then you may benefit by shopping private student loans in addition to federal direct PLUS loans. Just make sure you carefully review the benefits that are unique to the federal program. For more information, check out What s the difference between federal student loans and private student loans? 6

7 3KNOW THE DIFFERENCE BETWEEN VARIABLE AND FIXED INTEREST RATES After you submit an application and receive approval for a private student loan, you typically will be presented with the option to select a variable or fixed interest rate on your loan. The interest rate is the price you pay the lender in return for borrowing the money, so it s important to understand what you re choosing and why. A VARIABLE INTEREST RATE is different from a fixed interest rate as it can fluctuate up or down over the course of your repayment period. The variable interest rate that you see is comprised of two components behind the scenes: a margin and an index. Let s break it down further The MARGIN of a variable interest rate is based on the lender s assessment of your anticipated ability to repay the loan, and it does not change over the life of the loan. In other words, this component of the variable rate is actually not variable. The INDEX of a variable interest rate is based on an interest rate benchmark. While the lender selects which index to use, they do not control the value of the index. The most common index used for student loans is the London Interbank Offered Rate (LIBOR) index. As this changes, so will the index component of your interest rate. The margin plus the index totals the interest rate you are charged. 7

8 A FIXED INTEREST RATE is exactly what its name implies: fixed or the same for the life of the loan. The interest rate you receive when you take out the loan will be the same interest rate you have throughout the entire repayment period. LET S LOOK AT AN EXAMPLE When you applied for your loan, you were presented with a fixed interest rate option of 7.00% and a variable interest rate option of 5.00% (4.00% margin % index The table below shows how the interest rate options would be affected in three different scenarios. Notice the fixed interest rate remains the same in all of the scenarios, and the variable interest rate goes up or down based on the changes in the index. 5 YEARS LATER IN REPAYMENT FIXED INTEREST RATE VARIABLE INTEREST RATE Margin Index Variable Rate INITIAL INTEREST RATE 7.00% 4.00% 1.00% 5.00% SCENARIO 1: interest rate index increased 1.00% 7.00% 4.00% 2.00% 6.00% SCENARIO 2: interest rate index decreased 0.50% 7.00% 4.00% 0.50% 4.50% SCENARIO 3: interest rate index increased 2.50% 7.00% 4.00% 3.50% 7.50% For more information, check out What Makes a Variable Rate Variable? At the time of applying for your loan, a fixed interest rate will typically always be higher than the starting variable interest rate. While the variable interest rate is cheaper to start, you should consider your personal tolerance for the risk that it could go up (or down). 8

9 4ALL LOANS ARE NOT CREATED EQUAL When it comes time to apply for a student loan, do not assume that all student loans are the same. Benefits vary by lender, and some lenders offer more flexibility than others. Here are some of the key factors to look for in a student loan: REPAYMENT OPTIONS The repayment option is the way in which you are required to repay your loan. The biggest decision when it comes to choosing a repayment option is whether you want to make payments while you are in school or defer repayment until you graduate. Making in-school payments helps reduce the overall cost of the loan as you start paying down interest sooner. Some lenders will give you more options than others. At College Ave, we offer four different options on our undergraduate and graduate loans for you to choose from based on what works best for you. REPAYMENT TERMS The repayment term is the amount of time you will take to repay the loan. Paying the loan back sooner will result in a lower overall total cost, but it will also result in larger monthly payments. Choosing a longer term will help you manage your monthly payment, but it will be more expensive overall. The terms offered by lenders vary, and many lenders assign you a term without giving you the choice. At College Ave, we allow you to choose the term that works best for you. INTEREST RATES As mentioned previously, there are two types of interest rates fixed and variable and most lenders offer both options. However, when it comes to the actual interest rates, don t assume that all lender s rates are the same. Some lenders can offer better pricing options. To see what your rates would be at College Ave before applying, check out our pre-qualification tool it won t affect your credit score. At College Ave, we believe student loans should not be one-size-fits-all. Students and families need financing that s tailored to their goals, their lifestyles, and their budgets not those of their bank. You should consider what s important to you and look for a lender that gives you the options you desire. We give you the choice so you can build a loan that meets your needs. You can use our student loan calculator to find your perfect fit before applying. 9

10 5MAKING PAYMENTS WHILE IN SCHOOL REDUCES THE TOTAL COST OF YOUR LOAN Most lenders offer a deferred repayment option, which does not require payments while you are in school. Under this option, your repayment period begins after graduation, typically after a grace period of around 6 months. While this option is effective if you aren t able to make any payments while going to school, it is also your most expensive option. When you defer repayment, your loan continues to accrue interest. If you are borrowing as a freshman, this has an even greater impact on you as your loan has a longer time to accrue interest before your repayment period begins after graduation. Typically, when your repayment period begins, any unpaid interest is capitalized, meaning it is added to your overall balance that you owe. From that point forward, the interest that you owe will be taken as a percentage of the new balance rather than the initial amount you borrowed. If you make payments while you are in school, you can help reduce the total cost of your loan. If you can afford to, the best option is to make full principal and interest payments right from the start as this will result in the lowest overall cost. However, many students do not have the budget to do so. Making consistent smaller payments will still help reduce the total cost. If you re not able to make consistent payments, making a lump sum payment tax returns and graduation gifts are a good source at some point before repayment begins will help to reduce the amount of interest that is capitalized. When selecting a repayment option, always remember that you can pay more than you are required to (as long as your lender allows it), but you can never pay less. Missing a payment or making a partial payment has negative consequences on your credit that you want to avoid. 10

11 6DON T WAIT UNTIL THE LAST MINUTE TO GET A STUDENT LOAN The time from application to disbursement (when your student loan is sent to your school) varies by lender. While some lenders can process your loan very quickly, you should not wait until the last minute to start the process. At a minimum, the process includes participation from you, your lender, and your school. Even though this can be streamlined, there s always the possibility that something could slow it down such as your school certifying your loan. On top of that, there are certain regulatory periods (e.g., right-to-cancel period) that are required by law and cannot be reduced. Due to the presence of factors that exist beyond your control, it s important to get your student loan sooner rather than later. The last thing you want is to wait until the last minute and have an unexpected delay cause issues with your enrollment status at your school due the payment not being received. Get it taken care of early and reduce the chance of issues happening. 11

12 7UNDERSTAND THE IMPORTANCE OF CREDIT SCORES PRIOR TO APPLYING While federal student loans are primarily not underwritten, private student loans are. In other words, private lenders screen the applicant to determine their creditworthiness and anticipated ability to repay the loan. Lenders utilize varying criteria to assess the creditworthiness of an applicant, but in general, your credit score is one of the factors that plays an important role in this decision. Your credit score has an impact on two important decisions relating to your student loan application. SHOULD THE LENDER EXTEND YOU CREDIT? When you apply for a student loan, the lender will first use your credit score to determine whether they are comfortable extending you credit and issuing the loan. Lenders typically have thresholds they use to make this decision. The result of the decision usually falls within three buckets: not approved, approved, and approved on the condition an approved cosigner is added to the loan. WHAT INTEREST RATE SHOULD THE LENDER OFFER? The second decision the lender will use your credit score for is in determining what interest rate to offer. Typically, the higher the credit score, the lower the interest rate offered. It s important to understand the impact of credit scores on the student loan process so that you can get your credit in shape before applying. If you re interested in learning more about CREDIT SCORES, check out these helpful resources: What is a Credit Score? Understanding My Credit Score Tips to Improve Your Credit Score 12

13 8YOU WILL LIKELY NEED TO APPLY WITH A COSIGNER OVER 90% OF PRIVATE STUDENT LOANS INCLUDE A COSIGNER. A COSIGNER is another individual usually a parent or guardian who is willing to take responsibility for the loan alongside the primary borrower. The reason most borrowers need a cosigner goes back to understanding the importance of credit scores in the student loan process. Most borrowers who are fresh out of high school or in their early twenties do not have an established credit history, so either they do not have a credit score or their credit score is low. In addition to a lack of credit history, many private lenders have other criteria, such as an income requirement, that borrowers may not meet. As a result, many borrowers are prompted to apply with a cosigner someone who does meet the underwriting criteria in order to be approved. Some individuals who would be approved on their own also benefit from applying with a cosigner if the cosigner has a stronger credit profile than them. This could potentially help the borrower qualify for lower interest rates. Knowing in advance that you will likely need to apply with a cosigner can help save you time and make the application process easier. For more information on COSIGNERS, check out What is a Private Student Loan Cosigner. 13

14 9LOOK OUT FOR ORIGINATION AND DISBURSEMENT FEES OR PREPAYMENT PENALTIES An origination fee or a disbursement fee is a fee the lender charges you (the borrower) to issue your loan or to send the money to your school. This fee is usually expressed as a percentage of the loan amount, and it is either charged separately or added onto the amount borrowed. Regardless of how the fee is handled, the result is that you end up paying more money. An ORIGINATION FEE is common in other types of consumer lending like mortgages, but it is not common in the private student loan industry. Most private student lenders do not have an origination or disbursement fee. If you come across a lender who is charging a fee, be sure to compare the other benefits you are receiving, such as a lower interest rate, to determine whether the value of those benefits offsets the extra fee you have to pay. A PREPAYMENT PENALTY is a fee charged for paying back your student loan early. It could be for paying the entire amount owed back early (i.e., in a lump sum) or just gradually paying extra money each month. This is not a common practice in the student loan industry, so if you come across a lender that has a prepayment penalty, it should raise a red flag. You want the option to pay back your loan early as it will help reduce the total cost. One place you will likely see a DISBURSEMENT FEE is on federal student loans. Be sure to understand the fee you are being charged and the impact it has on the total cost of your loan. 14

15 10 DON T FORGET ABOUT THE AUTO-PAY DISCOUNT Most lenders offer an AUTO-PAY DISCOUNT, which is a discount you receive off your interest rate when signing up for automatic payments. You will likely see a 0.25% discount as this is standard in the industry. Lenders may already include this discount in the rates advertised, so when you are shopping for a loan, keep an eye out for fit. Signing up for auto-pay is a good idea simply for the fact that it lowers your interest rate and how much you owe. In addition, auto-pay ensures that you do not miss a payment, and it s more convenient than manually making a payment each month. However, the important thing about auto-pay is remembering to sign up for it. Once you select a lender and your loan is disbursed to the school, you should figure out how to enroll in auto-pay (will vary by lender) and do it immediately. Even if you have a deferred repayment plan and you are not making payments while in school, you will still want to receive the benefits of a reduced interest rate for the interest that is accruing during that time. Check with your lender to make sure they offer this as some may only allow the discount to go into effect when repayment begins. 15

16 Now that you are equipped with the 10 Things to Know When Shopping for Student Loans, good luck finding the perfect fit for you. Remember that what works for one person might not work for another, so take the time to find the student loan that fits your needs. If you have any questions that weren t answered here, drop us a note at studentloans@collegeave.com and let us know. We d be happy to help. To find your perfect fit with College Ave, visit collegeavestudentloans.com Best of luck and remember, You re unique. Your loan should be too.

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