How to Compare Student Loan Costs

When looking for the least expensive loan, be sure to compare college loans on an equal basis. The loans that are advertised as the most affordable may not save the borrower money.

For example, consider two $25,000 loans, a Direct Unsubsidized Loan with a 5.84% interest rate and a 10-year repayment term and a private student loan with a 10.5% interest rate and a 20-year repayment term. The longer repayment term yields a lower monthly payment and lower APR, making it seem more affordable. But, the total payments over the life of the private student loan are almost double the total payments on the federal student loan.

Loan Program Amount Borrowed Interest Rate Term Monthly Payment  Total Interest  Total Payments 
Direct Unsubsidized Loan $25,000 5.84% 10 years $275.55 $8,065.52 $33,066
Private Student Loan  $25,000 10.5% 20 years $250.00 $34,906.00 $59,906

Comparing the loans with the same repayment term yields a less misleading result. In this example, the higher-cost private student loan now has a greater monthly loan payment. So, be wary if a lender compares loans using different repayment terms or shows differences in monthly loan payments without information about total payments over the life of the loan.

Loan Program Amount Borrowed Interest Rate Term Monthly Payment  Total Interest  Total Payments 
Direct Unsubsidized Loan $25,000 5.84% 10 years $275.55 $8,065.52 $33,066
Private Student Loan  $25,000 10.5% 10 years $337.00 $15,480.00 $40,480

When looking for a student loan, be careful about advertised interest rates, as few borrowers qualify for the best advertised rate. Loan eligibility and interest rates are usually based on the credit scores of the borrower and cosigner, whichever is higher. The best advertised rate may be available only to a limited number of borrowers, typically less than 10 percent of the borrowers. Borrowers with bad credit may not be able to qualify for a private student loan at all or may get interest rates that are as much as 6 percentage points higher than the interest rates available to borrowers with excellent credit.

Loan comparison tools may be paid to promote certain loan programs ahead of others. Loan comparison tools may also list only the larger lenders or may list only loans that pay to be included on the tool. The only way a borrower can be certain about the actual interest rate he or she will receive is to apply for the loan. So, shop around to find the best loan.

Also, be careful of claims that a loan is better because eligibility is based on demonstrated financial need. A loan is a loan is a loan. A need-based loan may be a better loan because it offers better terms, but it must still be repaid, usually with interest. Some need-based loans may even be more expensive than non-need-based loans.

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