The Dark Side of Private Student Loans

The ads look appealing:  happy college students talking about not having to worry about their college tuition, showing off the new laptop they just bought . . . all thanks to private student loans.  But are private student loans as amazing as the ads suggest?

By now, most of us know you can’t trust commercials but private student loans are becoming one of the most popular ways for undergraduates to pay for their schooling.  The combination of reduced family contributions, reduced federal aid, and rising college costs has sent millions of needy students into the hands of lenders.  And, yes, many of them do receive the money they need but the majority doesn’t realize that those loans have a dark side.

Private Student Loans:  Not the Best Option

When we’re talking about private student loans, we’re not talking about the Stafford or the Federal Plus loans you can get through the government.  These loans are available to anyone and have fixed interest rates (currently 6.8%), but they also have maximum borrowing limits based on how far along you are in your college education (basically first years can borrow less than those students nearing graduation).

Private student loans, on the other hand, are different.  For one, they work like regular loans – you need to have your credit approved before the money is handed over.  That means you could get rejected altogether.  If you are approved but you have poor or no credit history, then say hello to sky high interest rates.  And, those interest rates offered at the start are often not fixed rates.  That means the rates can change while you’re paying them back.  Some of the interest rates are as high as 19%.  Can you imagine repaying $48,000 (the average cost of tuition for four years in the U. S.) in college debt at 19% interest?

Plus, most private student loan programs don’t put such strict limits on how much you can borrow.  That means you could easily borrow more than you need – maybe so you can buy that new laptop, iPhone, or wardrobe you wanted – and end up in real financial trouble after your graduate.

The Debt You Keep on Owing

All student loans are difficult to pay off, especially if you don’t land a great job the moment your diploma is in your hand.  With federal loans, however, there are programs available to help you, such as deferments, income-contingent repayment plans, and more.  Those options aren’t available with all private lenders.  If you can’t make your monthly payments, you can quickly ruin your credit which means you’ll have a hard time buying a car or a house later on.

In the past, if things got really bad for former students with private loan debt they could file bankruptcy and sometimes have their debt erased.  That’s not a possibility anymore.  Now private loans are treated just like federal ones in terms of bankruptcy law and that means you need to be nearly destitute before you can climb out from under the debt.

Private loans can be a lifesaver for some students, but only use them once you’ve exhausted all of your other financial aid options.  Otherwise, the bright future you want after graduation may get a lot bleaker.