Good afternoon everyone! So many folks seem stressed out this week as they shop for private education loan programs to help pay the college tuition bills that are due very soon. Many folks have contacted me to ask how to make that final decision as to which loan program to borrow through and how to go about repaying the loan. I thought that I would put some info out there with regard to Private Education Loan Programs and specifically what you need to be aware of when choosing repayment plan options.
Generally speaking, when applying for a Private Education Loan Program, the borrower will need to select which type of repayment option they would like. For example, many private education loan programs out there today will allow a borrow to begin paying back both the principal and interest right away OR to begin paying back interest-only OR to allow the loan to be fully deferred until the student graduates or ceases to be enrolled at least half time.
Most education loan programs require the applicant to select which repayment option they would like right up front, thus it is important for the applicant to understand the differences between the three repayment options as well as the costs associated with each option. As noted above, most loan programs offer an immediate repayment option, an interest-only repayment option, or an option to fully defer repayment.
The least expensive way to borrow a loan is to begin paying back both principal and interest right away, this is the immediate repayment option. This is a least expensive way to borrow for a few reasons. The first is that the quicker you pay back the principal loan amount, the least amount of interest will accrue over time, making for a cheaper loan. In addition, most companies access a lower interest rate for those choosing the immediate repayment option.
Knowing though that most families may not be able to afford to begin paying a loan back immediately, there are also the options of paying interest only or fully deferring repayment of the loan until after the student graduates. Of those two options, borrowers choosing to pay interest only will typically have a lower interest rate on their loan than those fully deferring which allows for a cheaper loan. Of course, paying interest as you go along can only save you money in the end as well.
Chatting with one Mom the other day, she mentioned how much she spends on groceries each month for one of her sons. Based on that revelation, she figured her grocery bill would decrease when her son leaves for college, thus was thinking of using that money to pay the interest on the private education loan. It is her way of trying to keep loan borrowing costs down and could foresee being able to reallocate saved grocery monies to paying the interest on her son’s private education loan.
The moral of the story here is that there are many ways of managing loan repayment and it is important to be well informed about loan repayment options, how each option affects interest rates, and how each option determines overall repayment costs. I found a nifty chart put out by MEFA that shows the costs of a $10,000 Private Education Loan under each of their three repayment plan options. Very helpful chart that puts the numbers out there so that borrowers can make an informed decision. Check out the MEFA Monthly Payment Calculator chart for some very helpful information.
Lots of great info on private loan programs and options for paying for college in our newly updated Financial Aid Book entitled Financial Aid Sense. If you know folks with juniors and seniors in high school, this book is a vital read for those needing to finance a college education.