6 Things Every College Student Must Know About Private Student Loans
The cost of college is increasing with frightening speed. A recent report shows that it has increased 12 fold over the last 30 years. This makes paying for college more difficult than ever, especially if you're limiting yourself to federal assistance. However, there are some things that you should know about private student loans before you sign up for them. A little bit of due diligence on your part can save you a lot of headaches down the road. (See also: To FAFSA or Not to FAFSA: A Former Student's View of Student Loans)
1. The Interest Rates Can Be Murder
When you get out of college, there's a good chance that you're not going to be making a ton of money. Unless you're in one of the top 10 paying majors — all of which are science, technology, engineering, and math (STEM) majors — you're going to be lucky if you even have money to start paying back your loans. This is why it's crucial to only take on low-interest loans. Private loans, however, have some of the highest interest rates going this side of credit cards.
2. Watch Out for Hidden Fees
Your publicly funded student loans are pretty straightforward. You fill out some paperwork, get a loan for what you need, and you pay back that amount plus interest. Private student loans are more like mortgages, however, and can be riddled with hidden fees. These can include origination fees, as well as penalties for late payments. Before you sign on the dotted line, ask about all the relevant fees and charges, as well as what happens if you can't make payments.
3.You Almost Always Need a Cosigner
There are virtually no private student loans out there that students can get without getting someone else to sign on with them. What's more — and not to get too morbid here — your parents or whoever you get to cosign for you will be on the hook for the money even if you are disabled or you die. You might have heard that there's basically no way to get rid of student loans short of paying them back. In the case of private student loans, they can continue to haunt people from beyond the grave.
4. You Should Shop Around for the Best Rates
When you take out loans through the federal government, the rate is the rate. It's set the same for everyone in Washington. Private student loans, however, are more competitive, meaning that you can shop around for the best available rates. You wouldn't buy a car or a house without shopping around for the best rates; why buy an education without shopping around? Go to at least three banks, and don't be afraid to play one against the other in your quest for the lowest rate. Make sure to research what the prevailing rates are nationwide before you even walk in the door.
5. You Can Borrow a Metric Ton
There are limits built into your student loans; these are called a "ceiling." Private student loans have a higher debt ceiling than those that you take out through Uncle Sam. That might sound like a good thing at first, until you realize that the money you're borrowing isn't actually going toward your education; Rather, it's going toward necessary expenses related to your education...at least in theory. In practice, it's going to go toward Friday night beer runs and the perfect set of bookshelf speakers for your dorm room. Don't take any more money than you absolutely need. You will rue the day if you choose otherwise.
6. Tax Benefits: A Silver Lining
On the up side, there are some tax benefits to taking out private student loans. FinAid reports that you can deduct as much as $2,500 in interest from your taxes per year on student loans, private or public. You can't refinance, and it won't apply to monies taken in the form of disbursement. However, the good news is that you can use the deduction even if you don't itemize your deductions on a Schedule A.
Get a Private Loan or Not?
The short answer is that you should avoid private loans wherever possible. Look for grants and scholarships, attend community college for a couple of years, or go to less prestigious state-funded schools. On the other hand, if you're going into a STEM field, borrow with caution, and pay back as quickly as possible.
Have you considered private education loans to help fund college?