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3 Things You Need to Know Before Choosing a Student Loan Company

College is stressful enough without having to worry about a growing mountain of debt — and student debt is still on the rise, culminating in $1.6 trillion in 2020. Lendedu’s 2019 Student Loan Debt by School by State report shows that the average student loan debt in Utah was $19,742 while average student loan debt in Connecticut was $38,776, with all other states falling between the two. Though these numbers are uncomfortably high, they provide insight into what type of loan and lending company would best fit your needs.

Know your options

You can choose from two types of student loans: private or federal. Each has various pros and cons, but for the sake of simplifying the two options, private student loan companies can usually provide much higher loans while federal student loans tend to be more forgiving. 

Whatever you decide, you should first seek financial aid through the Free Application for Federal Student Aid (FAFSA). You apply online for FAFSA which then helps colleges determine your financial need, providing you with options for loans (private loan companies included), work-study opportunities, and grants. The opportunity to apply for grants is in your favor because they do not have to be paid back like a loan.

Understand your opportunity vs. debt ratio

Whether you choose a private or federal student loan, it is important to research your state, including average tuition, loan debt, and out-of-college salary for your field, as well as desired colleges in order to determine what is best for you. 

For example, if you live in Utah and discover that the average out-of-college salary for your major or career field is $45,000, you should also take a look at Utah’s average student loan debt ($19,742) to shed light on your ability to pay off your debt post graduation. Taking these numbers into consideration can help you visualize what you can and cannot afford, as well as the financial risks that you might be willing to take.

Ask the right questions

When you decide that you need the help of private student loan companies, there are specific things you should find out before choosing one. Does the loan carry fees? Is the loan interest rate fixed or variable? When does the interest begin to accrue? Does the loan company offer any sort of grace period? Does repayment start immediately? Can you and should you have a cosigner? The more information you learn about a student loan company, the more equipped you will be to choose the perfect company for you.

How do student loans work?

Student loans provide individuals and families with options for paying for college and can be used to pay for tuition and fees, books and supplies, as well as personal expenses. Depending on whether or not you choose a federal or private student loan, either the government or a private company will provide the loan, which must be repaid. Federal student loans can be repaid after you finish school, while some private student loans may require payments to be made while you’re still in school. 

A student loan will either have a fixed or variable interest rate, determining how high or low monthly payments will be. A higher interest rate means that you will pay more, and vice versa.

How does student loan interest work?

With all loans there is an attached interest rate which must be paid in addition to the loan premium, or loan amount that you originally borrowed.

To calculate how much interest is owed, divide your interest rate by the number of days in a year. The resulting number is called the “interest rate factor.” Multiply the interest rate factor by your loan balance (the amount borrowed) and then multiply by the number of days since your last payment was made. This final number is the amount of interest charged in that period.

Some lenders also provide “interest calculators” to make this process even easier.

Can student loans be paid early?

Yes, but it depends on the lender. Most lenders do not have prepayment penalty fees, while some do. It is important to check whether or not a company has this fee before taking out a loan.

What happens if I can’t make my student loan payments?

The first thing you should do is contact your loan servicer and see what options are available to you. Depending on your circumstances and lender, there may be an opportunity to defer payments or receive loan forgiveness, but that is up to the lender.

Another option is to consolidate or refinance your loans, cutting down on multiple payments and potentially reducing your interest rate.

Do student loans qualify for forgiveness?

Only federal direct loans qualify for forgiveness. This is not an option with private student loans.

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