Informed Borrowing: Selecting Loans and Selecting Lenders

Before you search for the best student loan out there, you need to take advantage of funds available through scholarships and grants offered by the government, charities, workplaces, professional organizations, etc. After you have received all you can in scholarships and grants, your next option is a student loan. Here are some things to remember:

Go with the federal student loan programs

Federal programs such as Perkins and Stafford Loans for students and PLUS Loans for parents and graduate and professional degree students have fixed interest rates ranging from 5 to 8.5 percent. Private or alternative loans typically have interest rates that rise and fall with the economy. Private loans rely on credit reports; federal student loans don't.

Fill out a Free Application for Federal Student Aid (FAFSA) to see which federal loans you can qualify for. Subsidized Stafford loans charge a fixed 6.8 percent rate starting six months after you leave school. If you don't qualify for a subsidized Stafford Loan, your next option is an unsubsidized Stafford Loan, which charges interest immediately but gives you the option of not paying interest until six months after you leave school. Parents and professional and graduate degree students can borrow from the PLUS program at rates capped at 8.5 percent.

Preferred-lender lists

When you get a Stafford Loan, your school will give you the option of choosing a lender from their preferred-lender list. (Only about 20 percent of schools have students borrow directly from the federal government through the Direct Stafford Loan Program; at all other schools, you will need to choose a lender.) The preferred lender list is only a starting place when shopping for financing.

Check the terms and fine print carefully. Not all students can take advantage of all the benefits lenders advertise. Choose the loan that offers the best upfront discounts, such as waiving both origination and default fees, or other immediate discounts. Benefits that are promised several years down the road usually won't help you if you consolidate your loans or get into financial trouble.

You can find more advice and calculators at http://studentaid.ed.gov/PORTALSWebApp/students/spanish/repaying.jsp.