Ever wonder what really goes into a student loan? As you might have guessed, it’s much more than just a simple lender-borrower transaction.
Perhaps you’ve been bombarded by a myriad of ads for lenders claiming the best terms and prices. The tech seems savvier than ever, the process relatively simple and, in some cases, choosing a certain path could save you thousands of dollars over the life of you loan. But how does it all work, and how do you know which particular loan is right for you?
There are many players in the student loan ecosystem, and it’s worth taking some time to understand their unique roles. We’ll look at 4 of the most prominent types of student loan and lending-related sites in the market, with examples for each to help you understand how they work together and know what to expect.
Uncle Sam (Federal Government Programs)
The office of Federal Student Aid, a division of the U.S. Dept Of Education, provides more than $120 billion in financial aid (the large majority of student loans) each year. They are likely your first-stop in funding your education, and in many cases offer the best options (if you qualify) to take out and repay loans for a wide variety of life, financial, and educational backgrounds. If you’re wondering where Federal Loans come from, check out this overview from U.S. News & World Report.
As a critical budgetary concern within the Department of Education, the Office of Federal Student Aid’s operations are highly regulated and swayed by the economic climate and other factors. Nevertheless, it is a major pathway for millions of students to achieve their higher educational goals.
While historically reliable and affordable for many, government loans can sometimes be tricky to navigate. Private lenders, employers, and other innovative companies have set out to remedy things in their own way, with some offering good alternatives or supplements to federal programs. One such solution is a software platform to help students navigate to the best type of loan for them. Other remedies have included offering loans to students who weren’t qualified for Federal Aid, or reducing rates and terms for borrowers who are willing to consolidate and/or refinance.
When your needs change, you might consider consolidation through the Federal Government to combine your direct loans into a single payment and switch from paying several loan servicers to paying just one, or refinancing to take advantage of a lower interest rate or shorter payment term. Given a strong credit history, you might be eligible for better rates—something many borrowers seek on a regular basis as interest rates fluctuate.
One thing to note—if you do switch to private loans, you will not be able to go back to federal loans and may lose your federal benefits. If, however, you began your educational funding through the private marketplace, you should be familiar with the options available.
If you’ve determined refinancing to a private loan could meet your needs, it’s on to the aggregators to help you pick the right lender.
Nerdwallet is a well-known aggregator site that provides financial advice and connects customers to offers from popular lenders to compare/contrast to their needs. Their free membership model keeps users in an ecosystem, with credit score advice, spending tracking, and savings tips for the everyday customer. Lenders (like Laurel Road) contract with Nerdwallet to be featured on the site and get in front of a highly relevant audience—the millions of borrowers like you looking for low rates and great service.
In addition to convenience and ease, the progressive business model of aggregators like Nerdwallet has other advantages. They are a clear ‘snapshot’ of the market and rates, and they go to great lengths to explain differences beyond price, highlighting lenders and personal banking products with thorough reviews and analysis. With advice spanning from credit card consolidation, to investing, to travel rewards programs, you’re in good hands with the Nerds when it comes to making big (or even everyday small) financial decisions.
As for the bigger milestones such as student loans and mortgages, Nerdwallet doesn’t give preference to one lender over another, and presents you with a menu of choices you’re likely to appreciate for its variety. They do offer their own objective reviews, but each is measured with specific pros and cons that may influence your individual experience. As we’ve said, no one lender is for everyone.
Once you’ve settled on your preferred choice, you’ll be taken to the lender’s own site to begin the application process.
Historically, private lenders have filled a gap where Uncle Sam draws the line, working with specific institutions to offer additional funding options and in-school loan originations. For these reasons, the private loan market is positioned to augment federal loans when you have exhausted your federal options (originators like Sallie Mae), or replace them for qualified individuals seeking different terms/conditions (refinancers like Laurel Road).
Started in 1973 and initially servicing Federal Student Loans, Sallie Mae is now one of the largest private lenders in the nation. In 2014, Sallie Mae funneled most of its loan portfolio and loan servicing operations into Navient, a publicly-traded servicer that acts on behalf of the federal government and processes 25% of the nation’s student loans. Sallie Mae Bank continues to offer competitive private student lending, notably for part-time students and non-U.S. citizens who apply with a co-signer. They also stand out for their repayment flexibility, with terms from 5 to 15 years and loan amounts from merely $1,000 to 100% of school-certified cost of attendance.
In general, private lenders you might come across (Sallie, Sofi, Laurel Road, Earnest) herald specific—often significant—advantages over their federal counterparts, especially when it comes to refinancing your loans after graduation. These benefits often include lower rates, favorable repayment terms, and a more seamless experience. However, in order to qualify, you often must meet specific requirements, e.g. an excellent credit score and debt-to-income ratio, to enjoy these perks. Also, private lenders do not offer income driven repayments (IDR) and other repayment options that you have available under federal programs, so think hard about whether this type of repayment plan could benefit you. Consider the benefits of federally subsidized loans, loan forgiveness, and IDR that come with federal loans before looking into private loans. And remember that a private loan’s variable interest rate most likely change along with the federal interest rate, so you need to weigh that consideration when exploring variable vs fixed rate options. Currently as of this writing, the fed interest rate is at a historically low level (food for thought).
Once you’ve chosen your private lender, you’ll begin working with their preferred servicer. Some servicers include Navient, Nelnet, FedLoan, and Great Lakes. For this article, we’ll focus in on our partner servicer, MOHELA.
While Laurel Road handles refinancing your loan and the application process, we don’t service your loan. The job of the servicer includes sending out monthly statements, processing payments, and progressing with you as you pay off your loan balance to keep you in good standing. Most lenders outsource this function. Enter MOHELA. MOHELA, or The Higher Education Loan Authority of the State of Missouri, is one of the nation’s largest student loan servicers, utilized by us here at Laurel Road as well other prominent competitive lenders. Again, we welcome competition—it’s healthy for borrowers like you, leading to lower rates and better overall experiences.
Given their successful reputation, MOHELA has been recognized as one of the top-performing servicers in the nation. While no servicer has a spotless record, the combination of the right education and advocacy from your private loan provider improves the chances of taking on debt successfully and responsibly. We have been, and always will be, committed to supporting transparency and fair practices in lending.
Trust Your Instincts
While no lending experience will be perfect, understanding these players and the intricacies of the process should help you start exploring what’s out there with a more informed, critical eye. If you still have concerns as to whether taking out loans or refinancing is right for you, check out our other resources, and don’t hesitate to reach out.
In providing this information, neither Laurel Road or KeyBank nor its affiliates are acting as your agent or is offering any tax, financial, accounting, or legal advice.
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