4 Reasons to Think Twice About Using Private Student Loans
Student loan debt now surpasses credit card debt and is topped at over $1 trillion. Knowing this you might ask yourself, is attending college worth the thousands of dollars of debt? Arguably yes, as a college education is now usually the minimum requirement for a majority of jobs. That being said, many recommend that you do everything in your power to stay away from private student loans. Here are four reasons why you should think twice before taking out a private student loan.
No Guarantee That You Can Pay the Money Back
A bank or other financial institution usually handles private loans and their number one job is to make money. When these institutions give out a student loan it isn’t to help you get an education, it is to make even more money in interest. Unfortunately student loans are even worse than other types of debt as you cannot discharge them through bankruptcy unless you are in extreme hardship, such as a terminal illness or disability. Even if you do default on your student loan, the government guarantees the loan and will make sure that the bank is effectively repaid. This means that the bank has absolutely no reason to deny their borrowers a loan based on anything but need. However, as a borrower you should consider very carefully how much money you borrow as well as how much money you’ll realistically be able to earn. If you don’t think you’ll be able to repay your loan in a reasonable length of time then you should reconsider taking out a hefty private loan. Remember there is no guarantee that you’ll graduate with a job.
Private Loans Have Extremely High Interest Rates
When you apply for a private student loan, like most other loans, you are charged with interest. This interest is determined by a percentage, which is called an interest rate. For state and federal loans the interest rate is fixed at somewhere between 4 and 7%. On the other hand, private student loans have a much higher interest rate. This makes it much harder to pay it back in a reasonable amount of time, as you have to pay more in interest for every dollar you borrow.
Private Loans Don’t Offer the Same Repayment Terms as Federal or State Loans
Federal and state loans give their borrowers plenty of repayment options. You can decide to repay these loans in 10, 15 or even 20 years, which allows you to spread out your payments and sacrifice less. You can also choose to repay you loans based on your salary each year. However, this protection and flexibility is not offered with private student loans. Private lenders do not give their borrowers a variety of repayment options, and instead stick to a rigid repayment schedule that can be extremely difficult to follow right after college.
You’re Putting Others at Risk
The majority of private student loans require that a cosigner sign with the student. This means that the cosigner, who usually is mom or dad, is putting their credit at risk in the case that you default. As stated previously, defaulting is more common with private loans as repayment options are limited. In fact, even if you pass away prematurely, your cosigner will still be liable for your student debt as private lenders aren’t required to discharge debt in the case of death. Unfortunately, private student lenders are known to be one of the worst types of loan lenders as they have a tendency to harass those that owe them money. This can come in the form of annoying collection calls and even personal visits and can leave the cosigner frazzled.
loans - 13 Jun, 2014 - No Comments
