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Shopping for a student loan? Here’s how…

They may all have the same government-regulated interest rate, but not all student loans are created equal, explains Jean Chatzky.

Q: Our daughter is heading to college next fall. We cannot afford to subsidize her, and we all agree that for her to get the best from her college experience she should not be working more than a few hours a week to support herself. We are applying for financial aid, but our income is probably too high to qualify. What’s the best way to get a good rate on a loan?

A: Knowing how to get the best deal on a student loan is ultra-important since loans account for 75 percent of all financial aid. (Grants, which don't have to be repaid, only make up 25 percent.)

Unfortunately, student loans as a concept are widely misunderstood by both parents and kids. Why? Rates on student loans are set by the government. That means they don't vary from lender to lender. What does vary are the repayment options — and those can make a big difference in the amount of money that you pay over time.

As with most purchasing decisions, you need to shop around among the lenders available to you — typically in the state where you live or where your child will be attending school — with an eye toward your future situation. Here's what to look for:

Discounts for electronic transfers. When you start repaying the money, some lenders will give you a break on the interest rate of about a quarter-point if you have the funds automatically withdrawn from your bank account.

Reduction in origination fees. If you pay on time for the first 24 monthly payments, some lenders will forgive origination fees on your loan in excess of $250. If you have a large amount of debt, that can be very attractive. (On a $70,000 loan, for example, you could save nearly $2,000.)

Possible rate cuts. If you pay on time for the first 48 months, some lenders will knock two percentage points off your interest rate for the remaining term of the loan.

Capitalization of interest. If you're taking out an unsubsidized Stafford loan (one you have to begin paying back while the student is still in school), you can elect to have the interest capitalized. It's important to look at how — and when — the lender is doing so. The preferred method is to have it done once when you start paying the principal. If it's done more than once, you start paying interest on your interest.

Jean Chatzky’s Bottom Line
This week: Banking for college kidsIt used to be that most college students either got a bank account at home or signed up with the first one to get to them on campus. Now they have many more options, including web-only banks and credit unions.

  • How to pick a bank for your college-aged kid? Look at the fees. We know two things about college students: One, that they tend not to have sufficient funds to meet more than very modest minimum balance requirements and, two, that they visit ATM machines frequently (some every other day).
  • So what's the trick? Finding a bank that serves both those needs. First, he or she needs an account that offers the basics, including the ability to write eight to 12 checks a month without charging more than a few dollars for the privilege. Also, look for a bank that keeps minimum balance requirements to a minimum. Most banks, and certainly most credit unions, offer a plain vanilla account like this. Some even have one geared specifically to college students.
  • How about ATM fees? This is the biggest killer for most college students. Most banks don't charge ATM fees if you use their machines, so it pays to bank with the one on campus or with one that will rebate you a decent number of ATM fees.

Jean Chatzky is the financial editor for “Today,” editor-at-large at Money magazine and the author of “Talking Money: Everything You Need to Know About Your Finances and Your Future.” Her latest book, "Pay It Down: From Debt to Wealth on $10 a Day," is now in bookstores. Copyright ©2005. For more information, go to her Web site, .