For students and families looking to fill a gap in their college’s financial aid package, private loans may be a necessity. By shopping around to receive the best interest rate, borrowers could save thousands of dollars, according to a recent review of private student loans made to Iowa students and families.
The Iowa Attorney General’s Office surveyed student loan lenders to better understand the state of private loan lending in Iowa. The lenders surveyed were identified through lists that Iowa educational institutions provide to students. The AG’s office examined a total of 7,803 fixed interest rate loans from 10 lenders that responded to the survey.
A higher credit score does not guarantee a lower interest rate
Overall, the rates offered for private student loans during the recent survey period decreased from those offered during the last survey period (2017-2018). This mirrors the trends seen in other lending markets.
Analysis of the data collected demonstrates that just because borrowers or co-signers have a high credit score does not mean they will always receive the lowest interest rate available. Our analysis discovered that in some instances a borrower with an “excellent” credit score received the same interest rate, or higher, than a borrower with a “poor” credit score. However, on average, a higher credit score did correlate with lower interest rates.
Based on this analysis, it is crucial for borrowers and their families to shop around for the best rate and save money when financing their education. For example, a borrower with an “excellent” credit score of 750+ who borrows $10,000 at the highest rate offered to Iowa borrowers will accrue between $592.55 and $7,367.47 more in compound interest over the four years they delay repayment while in school than if they had borrowed the same amount from the lender offering the lowest rate during our survey period. Over a 10-year repayment period, that borrower will pay an estimated $1,500 to $29,700 more for the loan than they would have with the lower rate lender.
Advertised rates don’t always match reality
The interest rates received by borrowers did not always fall within the rates advertised by lenders, our analysis found. Lenders often advertise their lowest rate even though most borrowers won’t qualify for that interest rate. This deviation from advertised rates can benefit some borrowers: Four lenders lent at rates lower than what was advertised. Yet the remaining lenders surveyed offered Iowa borrowers interest rates that were higher than advertised. This demonstrates the importance of shopping around for student loans, as advertised rates and offered rates can differ. Complete an application and compare the actual rates and terms offered to you.
Variable rate loans could become expensive
While our survey focused on fixed-rate loans, many Iowans are borrowing loans with variable interest rates. Variable rates may appear lower than fixed rates because they’re expressed in a “margin” plus “index” format (ex. 3.5% + LIBOR) which requires borrowers to determine the current value of the applicable “index” and add it to the “margin” to understand the rate being offered. However, a variable-rate loan can be risky because the rate will adjust as the index varies and could significantly change the monthly payment.
While it’s possible an index could decrease or remain stable during repayment, borrowers should consider the potential for increased payments and weigh variable rate loans against the stability of a fixed-rate loan. Currently, the indices sit at a relatively low point, which means rates will likely increase substantially over the period of repayment.
TEN TIPS FOR BETTER BORROWING
Borrowing private loans may be a necessity for many Iowans and their families, but there are ways to ensure you’re making wise borrowing decisions and limiting the overall cost of borrowing for college.
- Exhaust all other financing options first. Only borrow a private student loan after you have exhausted all other options, such as scholarships, grants, work study, institutional payment plans, and federal student loans.
- Know your credit score and what it’s worth. Some lenders publish the rates they offer for each credit score. Find these lenders to get a good baseline for the rates you should be receiving from lenders.
- Shop around. Not all loans are created equally, and you may receive significantly different terms from different lenders. Shopping around gives you a much better chance of getting the best rate. Consider applying to a variety of financial institutions, including national or state banks, credit unions, and non-profit lenders, as their rates and terms may differ. Taking the time now can save you THOUSANDS later.
- Don’t accept the first offer. Let lenders know if you have received an offer better than theirs and give them a chance to meet or beat it. If they can’t, you will know you have the best offer.
- Don’t fear credit inquiries. Credit bureaus will typically treat inquiries within a short period of time as a single credit inquiry after the loan is selected, so borrowers shouldn’t hesitate to apply for private loans from several lenders; it’s the only way to know you’re getting the best deal.
- Don’t be fooled by teaser rates. Advertised rates and offered rates are often quite different. Complete an application and compare the actual rates and terms offered to you by different lenders.
- Include the fees. Some loans offer a 0% origination fee, but others may charge significantly more. Take these additional costs into consideration when comparing loan offers.
- Understand all the terms of your loan. The interest rate isn’t the only factor to consider when comparing loans. Length of repayment, interest capitalization, and additional fees can significantly affect the overall cost of a loan. Be sure you compare all aspects of the loans you’re considering.
- Understand the risk of choosing a variable rate loan. If you choose to borrow a variable rate loan, make sure to budget for the possibility of increased monthly payments during repayment.
- Don’t borrow more than you need. Review your budget to ensure you’re living within your means and not borrowing to finance an expensive lifestyle. Roommates and ramen mean less to repay after graduation and more of your monthly income for other expenses.
Learn more about private student loans at the Iowa Attorney General’s website.