The Massachusetts Educational Financing Authority, or MEFA, the not-for-profit authority that works with families on planning, saving and paying for college, suggests that students and their parents take their time and research their options before deciding on a plan for paying for college.
Here are 8 steps MEFA suggests student-loan seekers take before signing a loan agreement. Next
1. Plan for the entire year
Paying the balance due often comes from a combination of sources: savings, an interest-free monthly payment plan and loans. It’s a good idea to make a plan for the entire academic year instead of just one semester at a time. Next
2. Look for federal loans first
MEFA recommends that students always exhaust federal student loan eligibility first before seeking alternative loan options to cover college costs. The Federal Direct Stafford Loan is not based on credit, and there are numerous repayment options to help students manage repayment.
Any student who completes the FAFSA (Free Application for Federal Student Aid) is eligible. Go to fafsa.gov to complete a free application, and visit the Federal Student Aid site for more information on federal loans and repayment options. Next
3. Investigate interest-free payment plans
An interest-free monthly payment plan is one of the best kept secrets in minimizing the amount a family borrows. As the name indicates, they’re interest free and allow families to spread all or part of their balance due over 8-12 months. They usually require a small fee, and most colleges offer them. These plans have no credit requirements. Families can contact the student billing office at the college or university for more information. Next
4. Understand fixed vs. variable interest rates
Understand the difference between fixed and variable interest rates on college loans, and how they can impact the borrower’s budget. Variable rates can rise and fall with the markets. That means if rates go up, families will see monthly payments increase. The monthly payments on fixed interest rate loans never change because the rate never budges. Next
5. Know the interest rate before signing
Many college loan lenders practice tiered pricing, which means the low advertised interest rate only goes to borrowers with the highest credit score. Before signing on the dotted line, be sure to know the exact interest rate on the loan, whether that interest rate is fixed or variable and if there is an interest rate cap. Next
6. Know the total cost of borrowing
Be a wise borrower. Read the legallyrequired Application and Solicitation disclosures that provide the lowest and highest potential starting interest rates, whether the loan has a fixed or variable interest rate, the interest rate cap (if any) and the total cost of borrowing over the life of the loan. All non-federal college loan lenders must provide this document, so borrowers know exactly what they are applying for.
7. Consider a co-borrower
Students who want to apply for a college loan may find that applying with a creditworthy co-borrower strengthens their application, may allow them to receive a lower interest rate and still allows students who may not yet have a credit history to establish credit. Next
8. Keep track of changes in family’s finances
Many families are not aware that if they experience a reduction in income, they should be communicating that to the college financial aid office for review. This advice applies both to families who were awarded financial aid and those who have not yet applied.
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