college

Steps to take before signing a loan agreement

For students searching for college funding, navigating the wide world of student loans is a task almost as difficult as college itself.

To make sure your deal truly is as good as it looks on paper, here are the most important steps a student should take before signing a loan agreement.

As a rising number of students turn to loans to help them foot hefty tuition bills, the number of lenders, loan packages and financing options has grown as well, giving students a greater challenge when it comes to finding the best loan deal. The National Center for Education Statistics reports that more than two-thirds of all four-year undergraduate students take out loans in order to fund their educations.

Go to the feds first 
Despite the rise of lenders from every corner of the nation, Uncle Sam is still the largest provider of both free and borrowed cash for students. Before contacting private lenders, students should fill out the Free Application for Federal Student Aid to see what type of federal aid they can land. The information on this application will determine the expected family contribution, or EFC. The "free" money is in the form of grants, such as a Pell Grant or a Supplemental Educational Opportunity Grant , or SEOG.

Only after students have exhausted their free money possibilities should they seek loans, again turning to the federal government first. "Federal loans are safer and almost always cheaper than private loans," says Lauren Asher, associate director of the Project on Student Debt. "(Federal loans) come with some borrower protections, fixed interest rates, possibility for deferral."

Federal Stafford and Perkins loans have low fixed interest rates of 6.8 percent and 5 percent, respectively. These are significantly lower than private loan rates, which typically hover around 11 percent, says Justin Draeger, assistant director of communications for the National Association of Student Financial Aid Administrators. Additionally, Draeger says, federal student loans aren't tied to credit history, giving students with little to no credit the same access to college funding as their wealthier counterparts.

If you aren't eligible for a federal loan, you'll have to research private loans carefully. "Private loans are a whole other matter," Asher says. "The terms can change, the interest rates can fluctuate, the interest costs can quickly surpass whatever you borrowed, and they can be branded in ways that can be hard to tell what you borrowed."

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Students can begin their research using Bankrate.com's student loan rate comparison, which is updated weekly.

Enlist the parents 
Before turning to private lenders, try turning to your parents instead. The federally funded Parent Loan for Undergraduate Students, or PLUS loan, allows parents to borrow funds for their child's education. Like the Stafford and Perkins loans, PLUS loans have a capped interest rate (at 8.5 percent); maintain many of the same borrower protections, including deferred payment until after graduation, and are available regardless of financial need.

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