Student Loans 101
Beyond free money, student loans are the best choice to secure additional financing for school. Here are the basics you need to make informed decisions when selecting college loans:
Determine How Much to Borrow
The following steps will help you determine exactly how much money you will need to borrow for school so you don’t come up short and find yourself charging items at higher interest rates.
Step 1: Identify Your Educational Expenses
Work with your school’s financial aid office to identify all expected costs. Expenses to consider include:
- Tuition
- Fees (i.e., late registration, parking permits, etc.)
- Room and Board
- Text Books and Supplies
- Special Equipment (i.e., computer, etc.)
Step 2: Evaluate Your Existing Financial Resources
Because the total cost of borrowing can increase significantly with time, a good strategy is to borrow only what is absolutely necessary. Evaluate non-loan sources first to pay for many of your educational expenses. These sources of funding include your savings and current income in addition to the awards listed in your financial aid package.
Step 3: Calculate Funding Needed
The additional money you need to pay for the full price of your education is calculated as follows:
Total Educational Expenses – Total Funding Available = Amount to Borrow
Understanding Student Loan Interest Rates
Shopping for a student loan can seem daunting. Chances are you want to find the most competitive loan out there but you feel overwhelmed by the financial jargon. This is normal and you can rest assured that Citi is here to help you by providing you the information you need to evaluate your options.
How Student Loan Interest Rates are Established
Of the student loans available, interest rates for federal loans are the easiest to understand. Here’s why: All federal loan rates are set by the federal government so you will find that all lenders offer the same rates. These rates tend to be lower and more favorable than private student loan options. And, they are fixed, which means you’re locked in on a rate that won’t change over the life of the loan.
Tip: It is recommended that you borrow the maximum amount allowed in federal loans before pursuing private loans. This approach will help you pay back less in the long run. Plus, federal loans come with a wider selection of repayment options that help make your payments more manageable when it comes time to pay back your loan.
Unlike federal loans, private student loans have variable interest rates based on either the Prime or LIBOR (London Interbank Offered Rate) index. What does this mean? First, the interest rates on these loans fluctuate – rise or fall – in line with their relative index, Prime or LIBOR. As rates are adjusted, your monthly student loan payment will increase or decrease accordingly.
Tip: To understand the frequency at which your interest rate is adjusted, review your loan documents.
It’s important to understand that the Prime or LIBOR rate is not all that matters. This brings us to the second point: don’t focus solely on the index because the interest rate you will pay on your private student loan is the value of the index plus a margin. Since private student loans are credit-based, the range for the margin varies. Individuals with an excellent credit history will generally receive a lower margin resulting in a lower interest rate than those with less-than-perfect credit.
Tip: If you don’t have an established credit history or may have less-than-perfect credit, you can always apply with a qualified co-signer, which can potentially help you qualify for a lower interest rate.
How Student Loan Interest Rates are Calculated
The interest charged on student loans is calculated as simple daily interest. Simply put, the outstanding principal balance is multiplied by the interest rate and divided by 365 days to calculate one day’s interest amount. So, if you have a $10,000 loan, with a 7.00% interest rate, the formula would be $10,000 x 0.07/365 and the interest amount for one day would be $1.92.
How to Shop for the Best Student Loan
When rates are the same, as is the case for federal student loans, you need to look at other factors, such as a lender’s reputation and customer service. More importantly, look at borrower benefits such as interest rate discounts for repaying your loans through an auto-debit program. These types of incentives help lower your interest rate when you start repaying your loans.
Tip: When comparing lenders, choose one with experienced and well-trained customer service representatives. They can make a huge difference in how satisfied you are with your student loan. A knowledgeable representative will have answers to your questions and can be your ally in times of financial hardship. They can explain repayment options and help you avoid late or missed payments if you are having trouble paying.
For private student loans, while it’s tempting to choose one based on interest rates alone, it’s best to compare them using the Annual Percentage Rate (APR). Unlike basic interest rates, which may not represent the true cost of the loan, the APR takes into account all associated loan costs such as finance charges and loan fees (except penalty charges such as late payment fees). The formula used for calculating the APR also takes into account deferment periods and repayment terms. Each of these factors can have a significant impact on the cost of a loan. The APR adjusts for each of these items, illustrating the true cost of borrowing for your education over the entire life of the loan.
Since most lenders don’t tell you what your actual interest rate will be until after you submit your application and after they evaluate your credit history, look at the APR examples. They represent the lowest and highest interest rates actually available, giving you a good idea of what you can expect to pay under those two scenarios. Like most consumers, you can expect to receive a rate somewhere between the two examples shown. These examples also identify the index used and the published rate for that index.
Tip: All lenders provide APR examples; using them to compare two competing loans will give you a true apples-to-apples comparison of your options. And, just like federal loans, look for money-saving opportunities that help lower your interest rate when you enter repayment.
How to Choose a Student Loan Lender
Selecting a student loan with the right lender does not have to be complicated. To help you make the best decision, focus on the following key differentiators and ask the right questions when shopping around.
Assess the Overall Cost of the Student Loan
Look for competitive interest rates but don’t make your decision solely on this factor. You will also need to look at the Annual Percentage Rate (APR).
Flexibility in Paying Back Your Student Loan
You will want to assess your financial ability to repay your student loans. Some student loan lenders require you make monthly payments while in school whereas other lenders allow you the flexibility to make payments during school or wait until graduation to begin repayment. Be sure to choose a student loan lender that provides you the most flexibility to ensure your monthly payments are manageable. Understanding when payments are required will help you better assess your financial obligations and help you choose a lender that offers the right loan for you.
Borrower Benefits
Many student loan lenders offer money-saving benefits for services such as auto-debit payments. You need to understand the lender’s terms and conditions for their borrower benefits, and be realistic about the likelihood that you’ll be able to take advantage of them. Otherwise, you run the risk of being sold on a benefit that you are unable to qualify for or will lose because you are unable to meet the conditions.
Commitment to Customer Service
Choose a student loan lender with experienced and well-trained customer service representatives. They can make a huge difference in how satisfied you are with your student loan. A knowledgeable representative will have answers to your questions and can be your ally in times of financial hardship. They can explain repayment options and help you avoid late or missed payments if you are having trouble paying.
Proven Reputation
Choosing a student loan lender that has a solid reputation within the industry can also help ensure that you are satisfied with your student loan. Many schools use a lender list that provides the name and contact information of several lenders that they’ve worked with. They refer to these lenders because they have a good track record for offering students competitive rates and exceptional customer service.
Ask the Right Questions
When looking for a loan with the right student loan lender, don’t forget to also ask these questions:
- What is the total cost of my loan?
- Will I be required to make payments while in school?
- What borrower benefits or discounts are offered?
- Will the lender work with me in the event I encounter financial difficulties? If yes, how?
- How capable are the customer service representatives in helping me answer important questions about my loans?
Student Loan Comparison Guide
Find out which student loan is right for you and receive tips on how to choose.
Student Loan Application Process
When applying for a student loan, most of the process takes place behind the scenes. Here’s a high-level overview of each phase broken down by federal and private loans – from completing the application to getting the money.
What to Know (Federal)
Step 1: Tell Us About Yourself
Tell us about yourself, your school and the loan you are requesting.
Step 2: Complete Your Application
Add two references such as a parent, legal guardian or adult relative. Remember they must have U.S. addresses.
Once you supply these details, we’ll perform an instant identity or credit check, if applicable. Then, you’ll read and agree to our terms and conditions for your loan.
Step 3: Sign Your Loan
Review you loan documents and sign your application.
Tip: Applying and signing online, also know as e-signing, through our secure Web site is the fastest way to obtain your loan funds.
After you complete a student loan application, we’ll ask your school to confirm your enrollment and education expenses.
Getting Your Money
Once we receive your school’s certification, we’ll approve or deny your loan and request any supporting documentation needed to finish processing your loan request.
Typically, the funds from your student loan will be sent directly to your school and credited to your student account.
Tip: It’s common for a week to 10 days to pass before disbursed student loan funds become available. So, apply for your student loans early.
What To Know (Private)
Step 1: Tell Us About Yourself
Tell us about yourself, your school and the loan you are requesting.
You will need a valid e-mail address to receive electronic communication about your loan application. If your e-mail address changes during the application process, contact customer service immediately to avoid delays in getting your money.
Choose whether you will apply with a co-signer or not. Private student loans are credit based, which means the better the credit the lower the interest rate.
Tip: You can always apply on your own, however, applying with a creditworthy co-signer may improve your chances for approval and a lower interest rate.
International students need to apply with a U.S. citizen or permanent resident co-signer and will be asked to submit additional paperwork during the application process.
Step 2: Complete Your Application
Add your adult reference such as a close friend or relative. If you are applying with a co-signer, the co-signer may not be your reference.
You will also need to demonstrate your ability to view Adobe Acrobat PDF documents and agree to the terms of electronic delivery (receiving all communication regarding your loan application by e-mail).
After reviewing the Application Disclosure and Terms and Conditions, you will submit your application for credit approval. You will receive a response in 3 minutes or less, however, a credit decision may take up to 24 hours. Check back on our Web site within 24 hours if you do not receive your credit decision in 3 minutes or less.
If you have applied with a co-signer, they will need to complete their part of the application using the application ID that was e-mailed to them. They will then be the one who submits the application for credit approval.
Step 3: Sign Your Loan
Both you and your co-signer, if applicable, must review and accept your loan documents and offer, and electronically sign your loan.
Private loans often require self-certification to validate your financial need and school certification confirming your enrollment and education expenses. If these certifications are required, you will be notified during the application process after you have signed your loan. You will need to complete the self-certification, however, we will take care of the school certification.
Getting Your Money
You will be notified 7 days prior to your funds disbursing. To find this date, simply check the status of your application. At that time, you will be able to review the final terms of your loan including your interest rate, estimated total cost of the loan, and repayment terms.