Private Student Loans- The Dangers
Private student loans can have substantially higher interest rates than government backed student loans. In addition, private student loans do not have the same protections available with federally backed student loans, such as rights to deferment or forbearance.
It is unfortunage that oftentimes young people who are planning to go to college look at financing their education unrealistically. They tend to think little about the amount of debt they take on and just figure everything will work out because they will start working right away after college in a high paying job.
That is not always the case. Not long ago I read about a young woman who recently finished school and had a great job as a television journalist, but she was inundated by her student loan debt. She had taken out four student loans of which three were private loans. She chose to attend a prestigeous private college somewhere in New York and borrowed a total of $115,000 to pay for school. She was paying $1200 monthly on her student loans, and her pay was not nearly high enough to cover that amount of student loan debt each month. She tried to get a loan consolidation on her private student loans, but the lender refused her request citing tight credit market conditions. So for the time being she is stuck and just has to try and struggle through her financial problems. Her lender did make an offer for her to pay just the loan interest each month for a while, but this meant payments of $500 per month while leaving the total loan balance the same. Fortunately for her she does have a good job, and hopefully she will retain that because if she doesn’t she’ll have really big problems.
Her first error was something many young people do. She borrowed much more money than she should have. If student loan borrowers would only heed the following advice, millions would be saved the agony that goes with eventual student loan default. Don’t take out loans for more than you can expect your starting income to be. With federal student loans this young woman would have had the right to consolidate her loans, but her private loans left her at the mercy of the lender. She might be able to obtain a deferment, but she needs to be careful because she may find that after the deferment her interest rate is substantially higher. Not long ago I read about a young man who defered hid his private student loans for six months and was surprised to learn his interest rate jumped from 13% to 18%. Borrowers must be very careful and comprehend fully what it is they are agreeing to. It would be wise to have a parent or someone else who cares about you go over the papers with you. Stay away from elevated interest rates like the 18% rate mentioned above. And be aware that there is no way of getting out of a trap like that because even if bankruptcy is declared, student loan debt is not dismissed.
Another rule for borrowers is that your monthly payback amount should not exceed 10% of your gross salary. Beyond that amount you will probably find yourself overextended and struggling financilly.
Some student loan borrowers are intrigued by private student loans because of the relative ease of signing up for the loans, as opposed to the difficult and sometimes perplexing FAFSA form that must be filled out for federal loans. Since federal loans have many advantages over private student loans, everyone should go through the FAFSA process. Watch out for the latter. As stated above, don’t borrow more than your expected starting salary, and be careful your monthly payments won’t exceed 10% of your gross salary. And make sure you don’t default on your student loans, either private of federal. Learn much more about managing student loan debt at Student Debt Consolidation