How to Avoid a Bad Student Loan

As teens begin to grow into their adult years, many of them are faced with the choice to attend college. A huge factor in one’s ability to pursue higher education is funding. This is why student loans exist, but not all loans are created equal.

What Makes a Bad Student Loan?

Student loans can be considered “bad” if they have high-interest rates, hidden fees, or offer little or no support if the borrower has trouble making payments. If someone has taken on a bad loan, they can still refinance their loan with another lender offering better terms, but not everyone qualifies for refinancing. Therefore, knowing which loans are good and bad from the beginning can make things a lot easier for a borrower’s college career.

How to Avoid a Bad Student Loan

1. Choose the Federal Option

Federal loans are backed by the government and have multiple benefits over private loans. In general, they tend to offer lower, fixed interest rates, and borrowers can qualify even if they have no credit history. They also have more flexible repayment options than many private lenders. According to Lantern Credit, “The interest rate for private loans is also based on a financial index, but it’s one that varies by lender, plus a margin.”

2. Get the Lowest Interest Rate Possible

When you have to make payments on a large loan over many years, a difference of as little as 1% can save hundreds of dollars. Even if the student is seeking a loan from a private institution, there are ways to negotiate for a lower interest rate. For example, the borrower may qualify for a lower rate by adding a co-signer, making payments on time, or signing up for auto-pay. Some banks or credit unions may offer favorable rates for loyal customers, as well. The average interest rate on student loans is around 5.8%.

3. Look for a Fixed Interest Rate

Unlike a variable rate, a fixed rate stays the same as the borrower pays off the loan. Meanwhile, a variable rate may fluctuate depending on market conditions. More often than not, the interest rate on a variable rate loan increases over time, so borrowers end up paying more interest. In many cases, a private lender may advertise a variable rate that is lower than their fixed-rate loan. It may be tempting to choose the variable rate loan at first, but keep in mind that the rate will probably increase later.

4. Identify Hidden Fees

Some lenders will camouflage the true cost of their loan with additional fees, such as administrative fees, disbursement fees, or penalties for late or early payments. These types of costs are called “hidden fees” because they’re not immediately obvious when the borrower is comparing different student loans. Therefore, taking the time to carefully read through the terms of a loan can yield significant savings.

College is expensive, and taking on loan debt is simply part of the college experience for many of today’s students. Choosing the right loan with favorable terms requires some extra effort in the beginning. That effort will pay off after graduation when many people enter the workforce to start their careers.

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