Selecting a Stafford Loan Lender
It’s that time of year again for students to start working on financial aid paperwork. Selecting a lender is a key decision in the financial aid process. In talking with students, I’ve found that most believe that Federal Stafford lenders are largely the same and that it doesn’t matter who services their loan. Yes, it’s true that all Stafford loans are uniform in interest rate, loan caps, and the standard 10 year repayment plan. But the policy differences between lenders are often night and day.
Fees vs. No Fees
3% of your loan amount is used to pay the lender an “origination fee.” For every $1,000 you borrow, you or your school receives $970 and the lender pockets $30. So in order to receive $1,000 net of fees, you would need to borrow $1,031.
Many lenders now offer zero-fee Stafford loans, whereby they automatically and immediately rebate the 3% origination fee. Under the zero-fee option, every penny you borrow goes toward your education. In order to receive $1,000 net of fees, you would need to borrow… $1,000.
Many lenders that charge origination fees offer better rebates and other perks during the repayment period than the zero-fee loans. These lenders create charts to show that paying an origination fee upfront costs less in the long run than the zero-fee option. Don’t fall for clever marketing tricks.
These charts compare apples to oranges. Almost every comparison of 3%-fee and zero-fee loans assume that you borrow the same amount initially for both loans. In reality, you’d need to borrow 3.1% more to cover the origination fee!
So what if a $20,000 loan with a 3% origination fee and perks costs less than a $20,000 loan with zero-fees and no perks? The $20,000 loan with fees doesn’t pay for your education, because you get only $19,400 of it. You’d need to borrow $20,618 to receive an even $20,000. The picture looks a lot different when you consider the extra funds you’d need to borrow to cover the origination fee.
Do the math yourself, taking into consideration the extra funds you must borrow to cover any fees.
Rebates and Interest Rate Reductions
Most Stafford lenders offer some combination of rebates and interest rate reductions if you elect to have your monthly payments automatically debited from your bank account and make on-time payments for a certain number of years following graduation. The problem is that a single payment mistake, financial emergency or deferment/forbearance may automatically disqualify you from these benefits. Most borrowers do not end up receiving these rebates or interest rate reductions. Read the fine print carefully.
Grace Period
In an ideal world, all students land high paying jobs before they even graduate. But that doesn’t always happen. Most lenders offer some sort of grace period before payments are due following graduation. Look for a lender that extends at least 6 months of grace.
Capitalization
Unsubsidized Stafford loans accumulate interest while you are in school. Accumulated interest does not compound in school. After you graduate, you must either pay off your accumulated interest or else it will be capitalized. When the accumulated interest is capitalized, it is added to your outstanding loan principal, at which point it will begin compounding. Compounding interest works the same wonders on your debt as it does on your investments — except in the wrong direction.
Stafford lenders are free to set policies on when and how often interest is capitalized. Look for a lender that capitalizes interest after the grace period. This gives you time to pay off accumulated interest after you’ve gotten a job but before payments are due and the interest capitalizes.
Recommended Lender
Sorry, I can’t give a recommendation. 
That’s up for you to figure out yourself. As for me, I personally would choose Total Higher Education because they charge zero fees and automatically reduce the interest rate by 1.3% during repayment.
Consolidation
The law allows you to consolidate your loans while in school or after graduation to lock in a better interest rate, should rates fall. You are allowed to consolidate one time for each loan that you have. You can increase the number of loans you have, and therefore the number of times you are allowed to consolidate, by borrowing from a different lender each year.
