How Do I Choose a Loan Program?

Borrowing a loan is a highly personalized  decision.  This page is designed to help you think through some of the factors you will want to consider when choosing a loan program. We strongly encourage you to consider all the factors involved in making your selection since your decision will impact you for a number of years both while you're in law school and beyond. Keep in mind that the total cost of a loan is dependent on a number of factors and is not always the best way to choose a loan program. Consider the total cost along with other factors such as type of interest rate, credit check conditions, loan terms, repayment options and benefits, as well as personal financial preference, and future financial goals. 

Citizenship Requirements

Your citizenship status will have an impact on which loan program you can borrow through.

  • As a domestic or permanent resident student, you can borrow through any education loan program, with or without a co-applicant if you have a good credit history.
  • As an international student, there is one program through which you can borrow; Harvard University Employee Credit Union (HUECU) Student Choice International Private Student Loan program.  If you are a resident of India, you'll have a second choice through Credila Financial Services. Additionally, if you have a U.S. co-applicant you have more borrowing options since many lenders will allow international students to apply for loans with a qualified U. S. co-applicant.  

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Federal versus Private Loans

You have the option of borrowing a Federal Direct GradPLUS loan through the Department of Education or a Private Supplemental Educational Loan through a bank. The Federal Direct GradPLUS loan program has certain benefits guaranteed by law that may not be available through a private loan program.

  • The GradPLUS program has deferment, forbearance, and cancellation upon death or permanent disability built-in to the program terms. All of these are written in the law governing the loan programs. If the cost for a federal loan is higher than a private loan, you will need to decide if you wish to pay slightly more in order to have these benefits. This will depend on your individual situation (are you planning to enroll in additional schooling, if something happens to you, do you have a family that would be impacted by your debt, etc.). See the Advantages of Federal Loans page for more detailed information on these benefits.
  • Private loans typically do not offer these benefit options. If you decide that these benefits are not as high a priority for you and feel that the private loan is less expensive, you might choose to borrow a private loan instead of the federal GradPLUS.

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Credit Requirements

In general the GradPLUS credit review is less stringent than the private loan credit review. The bullets below give you more details regarding credit requirements.

  • GradPLUS loan approval is based on your credit worthiness. A basic credit check will be run. This means that if you are found to be 90 days or more delinquent on the repayment of any debt or the subject of a default, bankruptcy discharge, foreclosure, repossession, tax lien, collection account, wage garnishment or write-off of a Title IV debt during the last five years, your application will be denied.
  • Approval for private loan programs is based on your credit score. This takes into account all of the above, as well as, how many credit cards you hold, the limit on each of those cards and the amount that is accruing in interest. There are other factors that go into your credit score as well. If you need tips on improving your credit score, refer to the credit section of our web site or go to MyFico.com.
  • While we wish we could give you a specific number regarding what credit score would lead to an approval of a private loan, each lender has a specific number or range that a borrow must meet to be approved.  In general, it is thought that 700 and above is a very good credit score while 600 and below is less advantageous.  You can find out more on credit and credit scores by going to the Consumer Federation of American Fair Isaac Corporation site.

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The Impact of Your Credit

Your credit history could impact your interest rate and the program through which you can borrow.

  • If you have excellent credit, some lenders will offer you a better rate.
  • If you have poor credit, you can try to apply for a GradPLUS loan since the credit criteria is not as stringent as a private loan.
  • If you are denied a GradPLUS loan, you may be given the option of borrowing with a co-applicant.
  • We strongly encourage you to obtain a copy of your credit report. Requesting a copy of your credit report is a good exercise even if you think you have good credit. It has been our experience that some students find erroneous derogatory information on their report. It will take a few weeks to eradicate these errors and it would be to your advantage to work on these matters as early as possible in the loan application process. For more information on credit refer to our creditworthiness page.

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Your Expectation of Interest Rates

You will need to think about your personal financial philosophy. Are you more risk-oriented or conservative in your approach to money? What do you think is going to happen to interest rates in the future? Rates in the past five years have been at historic lows, and interest rates of 7-8% historically are good-to-average rates. Unfortunately, we know of no reliable way to predict future interest rates, however, here are some considerations:

  • If you are more risk-oriented and believe that the average interest rate over the time you hold your loan could stay the same or go down, then you might want to take out a private loan that has a variable interest rate. The benefit of a variable interest rate loan is that the interest rate could go down during the life of a loan and save you money in the long run. Conversely, the interest rate could also rise to the cap of the loan program which in some cases could be as high as 18% depending on the program.
  • If you are more conservative and believe that the average interest rate over the time you could hold your loan will be about the same or will go up, then you may want to take out a fixed interest rate loan. The benefit of a fixed interest rate loan is that you could lock in the current rate for the life of the loan.
  • To help you think about long term rate fluctuations a history of rates is available at MoneyCafe.

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Your Risk Tolerance

Are you someone who can tolerate fluctuations in your monthly payment amount?

  • If so, you might want a variable interest rate loan. The interest rate on a variable interest rate loan will change either monthly or quarterly, depending on the lender, therefore, your payment will also change accordingly.
  • If not, you may want to consider taking out a fixed interest rate. With the fixed interest rate your monthly payment will always be the same for the life of the loan. The predictability of this type of loan can help you manage your money for easily.

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Pros and Cons of Fees

  • Pros: You lock in a low, fixed interest rate or receive a benefit of some kind such as deferment or forbearance. You might be willing to pay more of a fee if the benefit or rate is judged by you to be worth it.
  • Cons: You may be paying a fee for a benefit that you will never receive  - especially if you pay the loan off early before the benefit goes into effect.

It is important to note how loan fees affect the amount that is credited to your e-bill. Fees are either added to the loan amount by the lender after disbursement, or they are deducted from the loan amount by the lender prior to disbursement.

All Federal Direct GradPLUS loans have a fee deducted from the loan amount. If you decide to borrow through the GradPLUS loan program you may want to increase the amount of money you borrow to make up for the fees. We will increase your budget to compensate for the additional fees.

For example:

  • You want to borrow a Direct GradPLUS loan net amount of $10,000.
  • There is a 4.204% fee taken prior to disbursement.
  • You should apply for $10,000 / 0.95796, or $10,439.
  • Your financial aid budget will be increased by $439 to allow for the fee.

Other supplemental loan types (i.e. MEFA) add the fee to the original loan amount and, as a result, no adjustment will be made to your budget to compensate for the fees and you will not need to increase the amount you borrow to cover the fees.

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Repayment Incentives

Are you planning on paying your loans off in the first few years after graduation or repaying over the standard repayment length dictated by the program you choose (10-15 years on average)?

  • If you believe that you will pay the loan off faster than required a benefit such as an interest rate rebate after 4 years of on-time payments may not be a true benefit to you as your loan will already be paid off in full.  Be sure to think about what benefit is being offered and how that benefits fits into your repayment plans.
  • If  you anticipate being on a standard repayment schedule, you should be honest with yourself about the likelihood that you will be able to meet the incentive requirements. Keep in mind that the repayment incentives are a marketing tool used by the lenders and that most students do not actually realize the benefit of the incentive. We strongly encourage you to make your borrowing decision based on a number of factors and not just the repayment incentives. Most borrowers that miss a payment miss the first payment and lose the benefit. Students miss the first payment for a number of reasons: they are busy after graduation, taking the Bar, moving, not updating their address with all of their lenders, never received a bill, or simply forgot they had a payment due.

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Length of Repayment

Are you considering participating in LIPP after graduation?

  • If so, you should consider the length of the loan’s repayment term and contact the lender to ask about the possibility of formally shortening the repayment term to 10 years from the 15 or 20 year terms that are typically standard. LIPP only provides assistance on the ACTUAL required payment and, although not required, recommends that participants place all of their loans on 10 year repayment terms. Estimated payments will not be considered for LIPP purposes.
  • If not, then your best bet is to make no adjustments to the length of your repayment since shortening it will require you to make higher payments. You can always choose to make a higher monthly payment without changing your repayment schedule.  This way gives you more flexibility to pay the standard amount one month while making a higher payment another whenever you choose!

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Logistics of Repayment

Are you someone who would prefer to have as few lenders as possible for your loans?

  • If so, you may prefer to have as many of your loans as possible through the same lender so that you only need to work with one agency. The benefit of this is that you will only have to make one payment each month for the loans through that lender. In fact, this is one of the built-in advantages of the Direct Loan Programs (Stafford and GradPLUS)
  • Since electronic debiting is so popular and mainstream now (making managing several payments at one time easier) you may be willing to work with more than one lender in order to take advantage of the best interest rates and repayment incentives available on the market today.

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Total Cost

Total cost should be a factor in making your decision of supplemental loan borrowing; however, we hope that you will consider all of the factors outlined above before making your final choice. In the end you will need to decide if, in a bottom line comparison, a $600 increase in total cost is worth the difference between a fixed and variable interest rate loan, or if a $1,000 increase is worth the security of federal cancellation benefits.  You may want to use a loan calculator to help you determine the cost of a loan based on several factors.  Keep in mind that loan calculators will give you a best estimate and are not actual repayment amounts since many programs have variable interest rates which cannot be predicted.  

FinAid.org

Direct Loan Calculator

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Last modified: December 17, 2013