Education is an investment, hence the willingness of so many college students to take on loans. Of course, there are other means of paying for education, such as the 529 savings plan, personal savings, scholarships, and federal student aid. But as of 2001, student aid could no longer cover the growing cost of education in the United States, leading many students to look to other possible ways to finance their college expenses. This is where private student loans come in—the last resort, to be considered only when all other resources or options have been eliminated.
Should you find yourself in this situation, here are some very important facts to take note about private student loans before you sign any contracts.
Private Loans Have Different RequirementsThis is a heading
Most federal loans will not require credit checks or co-signers. On the other hand, private student loans will often require good credit standing and may require co-signers. Loans that don’t require co-signers have significantly higher interest rates and are considered risky by the lender.
Private Loans May Be Tax Deductible
The good thing about private and government student loans is that these are tax deductible. Take note of certain breaks like the Hope Tax Credit and get a relief from interest payments. This is something few people realize, which means they don’t take advantage of the tax deduction.
Private Loans Come With High Interest Rates
A lot of students do not have any idea how much debt they’re getting into when taking on a loan—a problem resulting from the lack of financial training or education for youth. According to Time Magazine, interest rates on federal loans range from 3.4% to 7%, but private loans can go as high as 9% to 11%. It’s definitely a hefty responsibility that could give graduates a financially debilitating debt to pay off even before they find a job.
Private Loans Have Unclear Borrower Limits
Where government loans have strict guidelines on borrower limits, private loans vary. This can be a problem as students might be tempted to over-borrow. Financial aid expert Beth Cragar has noted that students should check their financial capability before deciding how much to borrow.
Private Loans Are Not Similar to Federal Loans
Government loans aim to keep interests as low as fiscally possible, and will include certain advantages like repayment postponement and deferment options. As mentioned, interest rates on private student loans are also higher. Plus, these private loans usually lack protection like forbearance or income-driven repayment plans. It is very unlikely that the student will be able to get an easier repayment plan from private student loans.
About the Author: Mackenzie Maher
Mackenzie Maher, Editor and Online Content Manager, graduated in 2010 from the University of California at Santa Barbara with a BA in Global Studies and a minor in Professional Writing, with an editing emphasis. Mackenzie’s diverse portfolio also includes writing, editing, photography, and documentary script writing on such subjects as travel, career, and finance. Next to writing, she is most passionate about world travel (she has visited 24 countries).