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Peer review: Stafford loan is best bet
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Q I am attending graduate school and need to apply for a student loan this year to help pay for the costs. I've received a list of student-loan providers from my school. I'm trying to decide whether a fixed or variable interest rate is best. My mom is pushing the fixed rate -- is that almost always best in these changing times?
SARA (25) WOODBURY
A You raise an issue that a lot of students are seeing these days regarding fixed and variable rates on student loans. The first loan I recommend you consider is the Stafford loan (sometimes called a FFEL loan).
This is a federal program that allows you to borrow up to $20,500 per year as a graduate student. The loans have a fixed rate of 6.8 percent and will likely be easier to get than student loans from private lenders. The rates on the private loans, whether fixed or variable, likely will be higher than the Stafford.
Based on the fact that you've already contacted your school and received a list of loan providers, I'm guessing you need more funds than are provided under the Stafford program.
The next option would be to find a loan from a private lender. Those loans will be credit-based and offer both fixed and variable interest-rate options. Your credit rating often determines what type of rate you will be offered. If you have less-than-perfect credit, a co-signer with good credit could help you get a better rate.
As to the fixed vs. variable rate question, the short answer is that it can go either way. The variable products are most-often tied to the prime rate or LIBOR index. Given the current interest rate climate, I would be inclined to choose a variable rate loan if the current rate is equal to or lower than a fixed rate alternative. In the shorter term, I think the chance that prime or LIBOR rates will go up significantly is rather slim.
Also, you likely will have the opportunity to consolidate your private loans after graduation. That means that in a couple of years, you will be able to reevaluate the interest-rate climate and the expected loan term to determine whether a fixed- or variable-rate consolidation loan will be better for you during the repayment period.
LUCAS BUCL, CFP (27)
Ka-Ching's financial experts at Edina-based Accredited Investors Inc. can be reached at kaching@startribune.com.
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