Information from the Washington State Department of Financial Institutions

Student Loans 101: Borrowing Basics

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Types of Student Loans

Generally, there are two types of student loans:

  • Federal student loans: These loans are funded by the federal government.
  • Private student loans: These loans are nonfederal loans, made by a lender such as a bank, credit union, state agency, or a school.

Federal Loans

It is generally a good idea to exhaust federally guaranteed loans before seeking private student loans. Federal student loans almost always cost less than private student loans. The federal government sets the maximum interest rates on federally guaranteed loans.

Private Student Loans

Private or alternative loans have terms set by the individual lender, not the government, and the rates are based on a borrower's credit history.

These loans are generally more expensive than federal loans and include fees. Fees can significantly increase the cost of the loan.

It is important to note that some lenders will discount the rate the federal government sets. Look for rate discounts, waiver of loan fees, reduction in loan principal, or other benefits that cannot be taken away.

Choosing A Lender

Federal law gives you the right to pick the lender of your choice.

Interest rates, loan limits, interest capitalization policy, repayment options and prepayment penalties can vary, sometimes considerably, depending on the financial institution underwriting the loan.

School Preferred Lender Lists

Some schools have "preferred lender" lists, but these lenders are merely a recommendation and students and their parents remain free to pick their own lender.

If your school has a preferred lender list, it is important to understand that different schools use different criteria to determine which lenders should be placed on their preferred lists, and these lenders may not always offer the best rates or terms available.

If the lender you choose does not have a proven track record of working with your school, make sure the school is aware of the lender you plan to use as soon as possible to avoid delays in processing.

Comparing Loans

Be careful when comparing loans with different repayment terms according to the annual percentage rate (APR). A longer loan term reduces the APR despite increasing the total amount of interest paid.

Also note that it is not uncommon for lenders to advertise a lower rate for the in-school and grace period, with a higher rate in effect when the loan enters repayment. Online financial calculators are important tools to use to generate meaningful comparisons of different loan programs.

  • Shop for the best rates
    Shop around to make sure you are getting the best deal. Important things to keep in mind include interest rates (whether they are fixed or variable and how they are calculated), any additional fees, and the lender’s deferment or forbearance policies. There are some websites, including www.finaid.org, which compare private lenders. But these sites often have financial ties to lenders who sponsor them or advertise on them. You should still contact lenders individually to learn about their loan terms and make your own decision about whether their loan is right for you.
  • Be wary of promises to lower your interest rate
    Some lenders may offer an interest rate reduction to students if they make their first 24 or 36 monthly payments on time. However, most lenders also know that this is a difficult requirement for borrowers to meet. Even if you make your first 22 payments on time, if the 23rd payment is late, even by a day, the reduced rate likely will not become effective. Also, be sure the interest rate reduction will transfer if your loan is sold to another lender. Get all the facts before you make a decision based on this promise.
  • Read all documents carefully before signing!
    This is true of any contract or document you sign. Before you sign, make sure the loan agreement matches any advertised rates the lender promised. If it differs, ask the lender about the difference BEFORE you sign.
  • Keep copies of all paperwork.
    This is important because often payments on student loans begin after students graduate from school, and this can be several years away. If you keep all of your loan documents, you will know exactly what the terms of your loan are and you can ensure the lender complies with those terms.

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