Your child should apply for a Stafford loan in the late spring or early summer before heading off to college because processing the loan can take four to six weeks. When the school participates in the Federal Direct Student Loan Program, you don't have to scout around for a lender -- the school's financial-aid office will tell you how to apply.
If you have an FFEL Stafford loan, you can choose your own lender. The interest rate and loan terms will be the same just about anywhere you go, although it's possible to find a lender offering slightly lower fees to attract more student-loan business. The differences aren't huge, so it doesn't pay to spend a lot of time shopping for a lender, but checking with a few might save you a little money down the road.
With whom does your lender work?
If you want to trim your child's costs in repayment, look for a lender that sells its student loans to Sallie Mae. The Student Loan Marketing Association, aka Sallie Mae, is the largest buyer of student loans on the secondary market (where banks sell their loans to raise additional money to lend). Sallie Mae owns about one-third of all student loans. In order to make its packages of student loans most appealing to investors, Sallie Mae offers incentives for student borrowers to repay on time, including:
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- A one-fourth-percentage-point break for setting up automatic loan payments from a bank account, and
- A one-percentage-point break in the interest rate after you make four years of on-time payments, which is effortless with automatic debits.
The total savings on a $17,125 balance (the most a graduate who finishes in four years can borrow) over the standard ten-year term could be more than $1,700. To find a bank in your state that sells its loans to Sallie Mae, call 800-891-4595 for the free brochure "Borrowing for College." Or visit Sallie Mae's Web site.
How often is loan interest capitalized?
If you're really ambitious about keeping interest to a minimum, and you're taking out an unsubsidized Stafford loan on which you're deferring both interest and principal payments, ask the loan officer how often the bank "capitalizes" the interest on the loan -- in other words, how often the interest you're deferring is added to the principal balance. The best possible answer is "once, when the loan goes into repayment." If instead the lender capitalizes the interest, say, monthly, the interest is added to your loan balance each month -- and you wind up paying interest on interest.
Use a bank you like and stay with it
Lots of banks, savings and loans, and credit unions make student loans, so if you like the service where you bank, that's a good place to start. You can also ask a financial-aid officer to steer you to a lender -- he or she is likely to know who has a good reputation for processing loans promptly and avoiding errors or delays.
Another alternative is for you to contact your state's guaranty agency for a list of convenient lenders. (Many of the state education agencies also serve as their state's guaranty agency.)
Whatever lender your child chooses, it's best to stick with that institution for loans throughout the four years of college, if possible. Keeping your loans all in one place will make repayment infinitely simpler: Your child won't have multiple loan payments to make and won't have to notify multiple lenders each time he or she moves, which recent graduates tend to do frequently.
