Why are private loans such a bad choice for students?

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With the high cost of a university education these days, many students have no choice but to borrow money to finance their degrees. If this is the route you plan to go, you should know that not all student loans are created equal – and borrowing privately for college is a decision you might end up regretting.

Two major problems with private student loans

When it comes to borrowing for college, you have two choices: you can take out federal student loans, supervised by the US Department of Education, or you can take out private loans, which are not regulated by a government agency. Here’s why private loans may not be your best bet.

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1. They generally offer lower interest rates than federal loans

The higher the interest rate attached to your student loans, the more it will cost you to repay. Interest on federal student loans is capped at preset rates. Federal subsidized direct loans and direct unsubsidized loans have a fixed rate of 4.53% for loans disbursed from mid-2019 to mid-2020. But with private loans, you could easily consider doubling the interest.

Plus, federal loans have a fixed interest rate, so you don’t have to worry about that rate going up during your repayment period. The interest on private student loans can be variable, which means that even if you start paying interest at 8% or 9% per year, that number can reach 10% or 11%, thus increasing your payments.

Of course, a caveat is that private lenders take your credit score into account when determining the interest rate for which you are eligible. If you have a good credit rating, you may be able to get a competitive rate comparable to what you would pay on a federal loan. But if your credit isn’t great, chances are, private loans will cost you more than federal loans.

2. They do not offer protections for borrowers

If you take out federal student loans and start having trouble with your repayments, you have options available to you. You can apply for an income-based repayment plan so that your monthly payments are recalculated as a reasonable percentage of your income. You can even request a postponement of your payments for a period of time if you are having financial difficulties.

Private student loans do not have these same protections. If you find that you can’t make your monthly payments to the point of not paying off your student loan debt, your lender could get a court order to garnish your paycheck, exacerbating an already difficult financial situation for you.

That said, some private lenders to do Give borrowers a break when they run into trouble with their payments, either by agreeing to lower their interest rate or by letting them defer payments a bit. But technically, private lenders don’t have to offer these options, so this is something you will need to consider when applying for a loan.

Be careful when borrowing privately for college

Generally speaking, your best bet is to exhaust your federal borrowing options before resorting to private student loans. If you’re only eligible for a certain amount of federal assistance and need more money to cover your education costs, private loans may be your best, or only, fallback option. But if you are going to borrow privately, read the loan terms very carefully so you know what you are agreeing to.

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