One shopper's experience certainly suggests it does. First, the good news is that shopping for student loans (within a 30 day period) has very little risk of adversely impacting your credit score. Fair Issac, the creators of the FICO score, made the following announcement recently:
FICO scores are typically one of several inputs that a lender will consider when making a decision on how to price a student loan.
Why does this matter?
Prospective student loan borrowers have little idea about the interest rate and fees that they will pay on a student loan until lenders have evaluated their credit and provided a conditional approval (some lenders make you wait even longer). There are exceptions to this rule, such as USC Credit Union, which provides the following chart with expected interest rates based on a borrower's FICO score and whether or not they have a co-signer:
= Interest Rate |
(with Cosigner) |
(No Cosigner) |
| FICO Score | Margin | Margin |
| 750 and above | 2.00% | 2.00% |
| 730 to 749 | 2.50% | 3.00% |
| 700 to 729 | 3.00% | 3.50% |
| 680 to 699 | 4.00% | 4.50% |
| 660 to 679 | 5.50% | 6.00% |
Also, several states, such as Alaska, Connecticut, New Jersey, North Dakota and Rhode Island offer fixed rate private loans through state agencies. Otherwise, the only way for a prospective borrower to know if they are getting a "good deal" is to shop multiple lenders. After the Fair Isaac announcement, they can now do that without fear that their credit score will get dinged for these multiple applications.
But don't lenders all use similar underwriting criteria, so most loans are priced very similarly?
My recent experience suggests that the answer is an unequivocal NO. I received approvals from six different lenders for student loans which I applied for as a co-signer for over the past week. These lenders were Wells Fargo, Chase, Citibank, Sallie Mae, Discover and SunTrust. The range of interest rates they offered me varied from 7.0% to 12.125%. Yes, you read that correctly, from 7.0% to 12.125%.
- Disclaimer: I do not pretend that my rates and fees are representative of what other borrowers will experience (but I must admit I was surprised by such a wide variance). Your rates and fees will be determined based on your individual (and your co-signer's) credit history, school attended and other factors that lenders do a wonderful job not disclosing. Some borrowers will get better rates, others worse rates and others may not have their applications even approved by these lenders.
How much could that extra half-hour spent filling out an additional application be worth?:
- Assuming a $5,000 loan taken out as a freshman, with a 15 year repayment period and an in-school deferment, the difference in the total cost of the loan would be over $4,000 ($13,023 - $8,998), based on the Access Group calculator. Obviously, the larger the loan, the greater the savings.
So, the next time a prospective borrower asks whether it makes sense to just use the same lender for alternative loans that he/she used for Stafford loans, tell them to spend an extra hour or two comparing their alternatives. That extra time could be worth thousands of dollars in savings.
For those wondering about the specific interest rates and fees charged by the six lenders I applied to, stay tuned tomorrow for a follow-up post.
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