Hitting the Books on Loans

The homework begins for today's college students long before they set foot in a university lecture hall. The late nights start with poring over an increasing array of student- loan options. "A big part of getting to college and staying in college is figuring out who offers the best interest rate, who offers the best loan-repayment program, who has the best customer service when you ask them questions," says Joshua Chaisson, a senior at the University of Southern Maine who estimates that he will graduate with $14,000 in loan debt. Bruce Gunther, a history teacher who attended a seminar on student loans at Franklin and Marshall College, where his son is a sophomore, says: "We've refinanced our home twice, and that is a piece of cake compared to the student-loan process." Indeed, perhaps the only simple fact about student loans is that rates have jumped. As of July 1, interest rates on existing federal Stafford loans increased to 6.54 percent from 4.7 percent, and they rise to 7.14 percent when a student enters the repayment period. All new Stafford loans now carry a fixed rate of 6.8 percent, and rates on new plus loans for parents have also jumped.

Here are some tips for deciphering the student-loan process.

Don't look just at the preferred-lender list. Most colleges steer students to a list of preferred lenders. When John Szum, the chief financial officer of a healthcare system in Boston and the father of two college students, went to a university website for loan information, he found "it doesn't necessarily offer the best financial deal for a parent." But students and parents need not restrict themselves to that list of lenders. "A lot of kids mistakenly feel that if you don't work with the preferred-lender list, you're going to have a problem, and that's certainly not the case," says John Pearson, a CPA and certified college planning specialist.

Read the fine print. The federal government sets the maximum interest rates and fees on federal student loans, but some lenders will absorb costs to capture your business. Even with federal loans there are benefits to be had, especially for low-income families, says Melanie Corrigan of the American Council on Education. But borrowers need to figure out which perks are best for them -and how to get them.

Pay attention to origination fees. An upfront fee of up to 4 percent of the loan's cost is usually charged when the money is disbursed, but some lenders will pay it for borrowers. On a $10,000 loan, getting a 4 percent origination fee waived will save you $400. But be sure to find out whether this fee must be repaid if the loan is consolidated with a different lender.

Get the best discounts. Many lenders will offer an interest-rate or principal reduction after a certain number of ontime payments-usually two to three years' worth. But this benefit is often lost permanently if the borrower makes a single late payment. "Unless you are very diligent and very careful, you won't get it," says Dallas Martin, president of the National Association of Student Financial Aid Administrators.

You'll also want to find out exactly what an on-time payment means to your lender. Does being one day late disqualify you? Fifteen days? Other questions: Do you need to request your interest-rate or principal reduction in writing? Is the discount calculated on the original or current principal? Must your loan have a minimum balance to get discounts? Will you lose your discount if your loan repayment is deferred or goes into forbearance?

Consider automated debits. Having your loan payment automatically debited from your checking account is probably the easiest way to get an interest-rate reduction. This should also ensure on-time payments. The discount, usually one quarter of a percentage point, would save you $215 on a $10,000 loan at the new fixed interest rate over 10 years. But you must always have enough money in the checking account to cover the debit. That's not always easy for recent graduates trying to stretch an entry-level salary to pay for rent, food, utilities, transportation- and a loan payment.

Check the repayment period. Find out when loan payments must begin, when interest begins accumulating, the time period for repayment, and whether other repayment options exist.

Always ask questions. "You need to go into your financial aid office and start asking questions, get online, and call each one of the lenders that is on that list that is sent to you," says Chaisson. "Speak to a junior or senior who is already in college and has been dealing with this for two or three years now. Who do they speak to and lend from?" Chad Sinclair, a junior at the University of Maryland-College Park who estimates that he will graduate with $60,000 to $70,000 worth of loans, says, "In the long run, you are the one who is going to have to pay these off, so you need to know what you are getting into."

• • With Savings Back in Style, Look Online for Top Yields
• • Real Estate: Pricing it Just Right
• • Paying for College: Strategies for the Ages