Shopping for Student Loan in America

News and Reviews Introduction - RON LIEBER wrote an interesting article in New York Times last Saturday about challenges of hunting the best student loan for academic pursuits in America.

He blunts that when college financial aid officers got into trouble last year for accepting gifts from lenders, the moral of the story was clear: You could easily overpay for your student loan by simply borrowing from a college’s recommended lender without first shopping around.

Ron warns that there is just one problem with comparison shopping for a private student loan. Doing so may damage your credit score. Since lenders quote higher interest rates to applicants with lower scores, some students could end up paying thousands of dollars more in interest over the life of their loans.

In few other areas of consumer life are you at risk of being penalized for seeking out the best deal. Indeed, mortgage and auto loan seekers who comparison shop within a relatively short period of time do not see their credit scores suffer. But Fair Isaac, the company that helps credit bureaus calculate credit scores, does not extend the same break to private student loan applicants or their parents, who often co-sign for loans.

This issue matters because even a small credit score decline can lead to a more costly interest rate. Every point counts at a time of tightening credit standards, when many lenders have been requiring higher minimum credit scores. In addition, banks have been getting stingier with another source that parents tap for tuition money, home equity loans.

To quote a rate, lenders check an applicant’s credit history. And every time a shopper asks a lender for a rate quote, it can show up as another inquiry on a credit report. Lots of inquiries send the wrong signals to the formulas that create the popular FICO credit score that Fair Isaac administers, namely that borrowers may be applying for multiple loans because they’re financially troubled and potentially going bankrupt.

So, in theory, how much could credit scores fall when people shop for loans? Fair Isaac says that each inquiry will generally not cause more than a five-point drop, though it may be more for a student with a short credit history.

Lenders generally check credit reports with only one of the three main credit bureaus. If a lender examines only one such report, an applicant avoids damage on the other two bureaus’ records. Then again, if all the lenders check with the same credit bureau, the damage may be especially high there.

Sure, lenders could help a lot by doing the following: First, state on their Web sites which credit bureau or bureaus they are using. Then, state whether that credit bureau is classifying their requests in a way that could damage an applicant’s credit score.

Meanwhile, some shopping around still makes sense. You’ll probably do best by comparing three or four lenders and finding the lowest rate — even if your credit takes a small hit in the process.

Start with a lender or two that your college recommends, since it may have negotiated special terms with them. Mark Kantrowitz, who runs the comprehensive college financing site, finaid.org, suggests shopping one bank, one finance company that specializes in student loans and then looking for nonprofit loan agencies that work with people in the state where you live or the state where you attend college (or both, if you’re lucky enough to have a choice). Mr. Kantrowitz has a list of such lenders on his site (I’ve linked to it from the online version of this column at nytimes.com/yourmoney, where there’s also a link to a New York Times Topics Page on student loans), or you can ask people in the financial aid office whether a nonprofit lender serves the college.

As you shop, however, keep one other thing in mind: Fair Isaac believes that if there is any credit score impact on applicants’ credit scores, it’s more likely to occur when people apply to smaller or specialized student loan lenders. Big banks, apparently, are less vulnerable. This will probably not make the scrappy upstarts happy, but they know who they can complain to.

Finally Ron Liber of NYT maintains that do all of your shopping within a week or two. Right now, there’s no sure way to know ahead of time whether the lenders to which you’re applying are ones that get a free pass in Fair Isaac’s system. If they do, however, you may lose the benefit of the exception by taking months to find a loan.

News and Reviews Conclusion - For Indian Students, it is prudent to explore Loan Options back home as taking a Student Loan in USA without any credit history may be expensive. Sure, some of the best school / ivy league you may get the good deal but loan or Insurance purchase from American Campus will be costly proposition. Same is true with Student Insurance in American Campuses. The plunder is rampant for International Students seeking to get higher education in the United States of America.