A recent survey of lenders offering private student loans to Iowa students and families highlights a clear lesson:

Shop around and do your homework, or risk paying more for your education.

Federal student loans are always the best option for student borrowers.

However, many Iowa students will find that scholarships, grants and federal student loans fail to cover all their costs.

Private student loans can close gaps in financial aid packages.

This summer, the Iowa Attorney’s Office surveyed student loan lenders in an effort to better understand the state of private loan lending in Iowa.

The lenders surveyed were on lists that Iowa educational institutions provide to students.

The Iowa Attorney’s Office examined 10,452 student loans from 20 lenders that responded to our survey questions

The survey found that savvy borrowing can save borrowers a lot over the life of their loans.

Findings

g Good scores don’t always equal low rates.

Data collected in our survey showed that students and co-signers with similar credit scores received widely different interest rates. Although interest rates often are related to credit scores, and borrowers with poor credit receive less competitive rates, Iowans with high credit scores should not assume they are always being offered the lowest interest rate. Our survey found that rates obtained by borrowers or co-signers with similar credit scores varied widely and many borrowers with good or excellent credit scores receive the same high-interest rate as students with fair or poor credit scores.

Applying for private loans from several lenders gives borrowers the ability to comparison shop without greatly affecting their credit score.

Iowans should consider applying to a variety of financial institutions, including national or state banks, credit unions and nonprofit lenders as the rates and terms offered may differ.

g Variable rate loan rates can soar.

Many Iowans are borrowing loans with variable interest rates, which can be risky.

When comparing loan offers, variable rates may appear lower than fixed rates because they’re expressed in a “margin” plus “index” format. This format requires borrowers to determine the current value of the applicable “index” and add it to the “margin” being offered to fully understand the rate being offered.

In addition to requiring more up-front analysis, variable rates have the potential to change significantly over the life of the loan. The “index” is the varying part of a variable interest rate. An index may go up, down, or stay relatively stable during the decade or more borrowers will be repaying the loan. An index changes due to broad financial factors that can be difficult to predict.

As an index varies, so does a borrowers’ monthly payment. If the index increases, the unexpected increase in monthly payments can make repayment difficult.

While it is possible an index could decrease or remain stable during repayment, Iowans should consider the potential for increased payments and weigh variable rate loans against the stability of a fixed-rate loan.

g Know the additional fees.

The interest rate is not the only number that should be reviewed when comparing loan offers.

Fees, such as origination fees, increase the cost of borrowing. These fees are deducted from the amount being borrowed, which means borrowers often need to borrow more than originally intended to ensure the amount available after fees is sufficient to meet their college costs. When comparing different loans, borrowers should be sure to know all the terms.

Sensible strategies

Borrowing private loans may be a necessity for many Iowans and their families, but there are ways to ensure you are making wise borrowing decisions and limiting the overall cost of borrowing for college.

g Know your credit score. Some lenders publish the rates they offer for each credit score. Find these lenders and get a good baseline for the rates you should be receiving from other lenders.

g Shop around. Not all loans are created equal and you may receive significantly different terms from different lenders.

g Don’t be fooled by teaser rates. Advertised rates and offered rates are often quite different. Complete an application and compare the actual rates and terms offered to you.

g Figure in the fees. Some loans offer a zero percent origination fee while others may charge significantly more. Take these additional costs into consideration when comparing loan offers.

g Understand all the terms of your loan. The interest rate is not the only factor to consider when comparing loans. Length of repayment and additional fees can significantly impact the overall cost of a loan. Be sure you are comparing all aspects of the loans you’re considering.

g Understand the risk of choosing a variable rate loan. If you choose to borrow a variable rate loan, make sure to budget for the possibility of increased monthly payments during repayment.

g Don’t borrow more than you need. Review your budget to ensure you’re living within your means and not borrowing to finance an expensive lifestyle. Living like a “poor college student” while in college will lead to lower monthly loan payments after graduation and leave more of your monthly income for other expenses.

g Exhaust all other financing options first. Only borrow a private student loan after you have exhausted all other options, such as scholarships, grants, work study, institutional payment plans and federal student loans.

Learn more about private student loans at the Iowa attorney general’s website.


Tom Miller is the Iowa attorney general. He may be reached at consumer@ag.state.ia.us.