Private Student Loans: The Good, The Bad, and The Ugly.
Here’s the bottom line: College is expensive.
With tuition fees increasing 2% to 3% annually, and endowments shrinking at a faster rate, it raises the question – are students able to rely solely on financial aid to pay for college? Taking a private student loan is fast becoming an alternative for college students to pay for the exorbitant tuition fees but is it a viable and sustainable option? Let’s break it down.
Higher interest rates. Private Student loans are accompanied by higher and more variable interest rates than Federal Student Loans. This means that students are likely to incur a larger college debt if they take a private loan than a federal loan.
Immediate Repayment. Private Student Loans may not have a deferment option, so students are required to start repaying their loans after graduation or earlier.
Credit check. Unlike federal student loans, which does not take into account your family’s financial history, private student loans do. After all, private student loans are provided by private firms and banks, and your credit history will determine approval and interest rates.
Fewer consolidation options. When repaying federal student loans, students are given the option to consolidate all the loans into one repayment plan for easy and hassle-free repayments. This luxury may not be present for private student loans, which means one oversight in planning could result in a $1000/month installment plan. As a fresh graduate, you most definitely do not want to be burdened in this cost-ineffective method.
Interference with one’s life plans. So you got your life plans figured out, but taking a private loan might put your plans on hold because you might need to get a job immediately after graduation to start clearing your debt. You’ll need to earn a certain salary and may have to pass up more fulfilling but lower paying jobs for the one with the highest salary. This also means that you might have to skip your post-graduation trip with friends and join the workforce earlier than planned. It might also mean that delaying certain major life events (i.e. buying a car, moving out of your parents’ home, etc).
There’s no restart button. There is no such thing as revoking your private student loan. You are obliged to stick with the installment plan, embrace the volatile, often upward increase in variable interest rate, be ready for additional paperwork, and if you’re staying with your parents, hear your parents’ incessant nagging even after college.
Bankruptcy? Loans are expensive, and this extreme scenario is also the least likely scenario.While this MAY be a possibility, it does not mean that taking a private student loan means that you are doomed and setting yourself up for bankruptcy. But it is important to bear in mind that student loans are not eligible for bankruptcy. The debt will stick with you no matter what.
Ability to finance 100% of your education. Paying for a college education doesn’t mean just paying for the tuition, room, and board. There are implicit costs such as books, computer, off-campus rent, and study abroad programs. Remember, there are limits for federal student loans, and private student loans can help close this gap even after you have exhausted every available federal student loan offered by the government.
College education as an investment. Depending on the career you’re intending to pursue, the cost of a college education can be negligible compared to the increased salary you receive because of your education.
Private students loans are not meant to hurt you, but are alternatives to help you pursue you career and academic aspirations. If you are eligible for federal student loans, exhaust every possible option first before applying for private student loans. Also, consider your other options for college. Do you have less expensive alternatives that could minimize your debt? Could you start at a community college and transfer to a four-year college later?