Borrowers have a lot to consider when comparing student loan programs. In addition to the interest rate and fees paid on the loan, applicants need to determine whether a fixed or variable interest rate is the better option, and which repayment terms make the most sense for their circumstances. Lender flexibility and customer service may also be important, especially if the borrower encounters difficulty repaying the loan.  Total payments should be considered in addition to monthly loan payments.

Annual Percentage Rate

The annual percentage rate (APR) is a measure of the actual yearly cost of borrowing money. In addition to the interest rate, it factors in any application fees, loan origination fees, the repayment term and certain discounts offered.

Private student loan lenders, such as banks and credit unions, are required to disclose the APR on all advertised loans. The government does not disclose APRs on Federal Direct Loans, but calculators can be used to help make comparisons with private loans, particularly as Federal Direct Loans have origination fees.

Most private student loan lenders do not explicitly charge application or origination fees. However, they frequently offer discounts. Borrowers should carefully examine the discounts embedded in the advertised rates when comparing loan alternatives.

The most common discount is for auto-debit during repayment. This discount is available for Federal Direct Loans and most private loans. Many private lenders also offer an additional discount for using an account with their institution to make payments. Some offer cash back awards for attaining a certain GPA or upon graduation. Discounts may also be available for choosing to make interest payments while in school or for a record of consistent on-time monthly payments.

The lowest advertised rate is not necessarily the interest rate the borrower is eligible to receive. The lowest rates for private student loans often require a cosigner that becomes jointly responsible for repayment. Independent borrowers tend to pay higher rates. The interest rate for private loans depends upon the credit of the borrower and/or cosigner. Most private lenders offer 5 or 6 rates for different levels of creditworthiness.

In addition, the lowest published APR for private student loans might only apply to a shorter repayment term than desired. The interest rate offered on Federal Direct Loans is the same for all borrowers regardless of the repayment schedule.

Fixed or Variable Interest Rate

Student loans may have either a fixed interest rate or a variable interest rate. Fixed interest rates are constant over the life of the loan, while variable interest rates can change as frequently as every month. All Federal Direct Loans have a fixed interest rate that is set annually for new loans. Private lenders usually offer fixed and variable interest rate options. The better interest rate choice for private student loans depends upon the borrower’s specific circumstances.

Fixed interest rate student loans offer stable monthly payments, but variable interest rates tend to be lower at the start of the repayment term and might result in less total interest paid if the borrower pays off the debt early.

A borrower on a tight budget may want a fixed interest rate, while someone with greater financial resources may prefer a variable interest rate.

Fixed rates may be lower if the borrower opts for a shorter repayment term. The risk of rising interest rates is greater for variable interest rate loans with longer repayment terms.

If the difference between fixed and variable rates offered is small, the potential savings may not be worth taking on the risk of higher interest rates.

Repayment Terms

Student loan options include a variety of repayment terms. Private loans have a narrower set of choices, while Federal Direct Loans offer greater flexibility. Borrowers need to balance the affordability of lower monthly payments with the desire to minimize the overall cost of the loan.

Most private student loans have repayment terms of 5, 10, 15 or 20 years, though options vary by lender. Borrowers may have the choice of beginning repayment immediately after receiving the loan, by making interest-only or fixed payments while in school, or deferring repayment until after leaving school. The repayment terms for private loans are set when the loan agreement is signed.

The standard repayment term is 10 years for Federal Direct Loans, but borrowers may be eligible to elect repayment terms as long as 25 or 30 years. Borrowers are also eligible for one or more income-driven repayment options, which base the monthly payment on a percentage of discretionary income. Graduated repayment plans start with lower payments and increase the monthly payment every two years. All payments can be deferred while in school and during a six-month grace period thereafter. The borrower chooses the term over which the student loan is repaid after leaving school.

Monthly payments are lower for longer repayment terms, but the total interest paid is higher. Thus, it is important to consider the total payments in addition to the monthly payments when comparing different loans.

The total interest paid is also higher when payments are deferred during the in-school and grace periods. Interest accrues during this time and is capitalized when repayment begins. Making monthly interest payments or partial payments while in school lowers the monthly payment after graduation.

Repayment based on an income-driven or a graduated repayment schedule also results in higher overall borrowing costs because of smaller initial payments and a longer repayment term.

The table below provides an example of the monthly payment and total interest paid over the life of a loan with various repayment terms. The original loan balance is $10,000, the interest rate is 5%, and there are no fees or discounts. Monthly payments are level during the repayment term. Interest is capitalized once, at the end of the 45-month in-school and 6-month grace periods before repayment begins.

As the table demonstrates, the total payments on a student loan with a 15-year repayment term is more than twice that of a 5-year loan with interest-only payments during the in-school and grace periods, despite the much lower monthly loan payment.

Repayment Term

In-School Payments

Monthly Repayment

Total Interest Paid

5 years

None

$228.81

$3,729

5 years

Interest Only

$188.71

$3,448

10 years

None

$128.60

$5,433

10 years

Interest Only

$106.07

$4,853

15 years

None

$95.88

$7,259

15 years

Interest Only

$79.08

$6,359

20 years

None

$80.02

$9,205

20 years

Interest Only

$66.00

$7,964

Lender Flexibility

Borrowers should evaluate their options for financial relief if they have trouble making their monthly payments due to job loss, medical leave or other financial difficulty. For private student loans, they should also consider the potential needs of their cosigner, if applicable.

Federal loans may offer deferment or forbearance to allow the borrower to temporarily reduce or postpone payments. Private lenders may offer full or partial forbearance, but the terms vary by lender and may be less generous than those available from the federal government.

Many lenders discharge student loans due to death or total and permanent disability (more for death than disability). But, each lender establishes their own criteria for making a disability determination.

Many private student loans permit the borrower to apply to release a cosigner from their obligation once certain conditions are met. This requires establishing the enhanced creditworthiness of the borrower, typically a number of years of on-time payments after graduation. Releasing a cosigner can free them to seek additional credit elsewhere, such as cosigning a loan for another child.

Customer Service

Good customer service often matters. Before taking out a loan, an applicant may need clarification of the terms in the loan agreement. They might later have questions about loan disbursement. During repayment, a borrower that experiences financial hardship may need assistance with seeking relief. Look online for reviews and check with the Better Business Bureau for a history of complaints or government actions against the lender.

Be sure to consider the percentage of borrowers who complain, not just the total number of complaints. A larger lender or servicer will accumulate more complaints because they service more borrowers, not necessarily because they provide inferior customer service.

There Is No One Right Student Loan for Everyone

The best student loan choice depends upon several factors unique to the borrower. And some of these factors might change while the student is enrolled or after repayment begins. Applicants should carefully assess their likely monthly payments and total borrowing costs, as well as qualitative factors like lender flexibility and customer service.