Should I Get a Private Student Loan?

When you’re stuck in your dorm room eating Ramen noodles while your friends head out for an evening of pizza and beer, it’s easy to feel left out. But if you’ve already borrowed to the hilt from Uncle Sam, aren’t eligible for grants or scholarships, and you’re juggling a part time job along with your classes, you may feel stuck. From that vantage point, private student loans can seem like a godsend. However, from fluctuating (and often high) interest rates to required payments while you’re in school and often inflexible forgiveness plans — even if you lose your job, private student loans actually represent ugly debt.

When you borrow from a federally-guaranteed student loan program, there are no credit checks. Your loan is based solely on your financial need. If you are a U.S. citizen enrolled at least half-time in an eligible higher education institution, you are all but guaranteed to receive a loan from the government.

This is not so with private student loans, which usually require borrowers to pass stringent credit checks. If your income is insufficient (which is the case for many students), you will need to provide a credit-worthy co-signer to qualify for the loan, even if your credit rating is golden. When hard up for cash, it’s easy to ask anyone and everyone to be your co-signer – your parents, your friends or even your distant family. But If you default on the loan or pass away, private loan companies wont hesitate to try to collect their debt from the co-signer.

Federally guaranteed student loans carry interest rates that are fixed for the life of your loan. By contrast, interest rates for private loans fluctuate based on market factors and your credit rating. In addition, those interest rates are often higher than those set by the federal government, which means that your total repayment will be drastically higher. Worse, you may have to make interest payments on your private student loan even while you are in school. Federal student loans allow you to defer payments until after you leave school and have exhausted a grace period.

Have you decided to join the Peace Corps or complete a stint with Volunteers in Service to America (VISTA)? Fantastic. If you have federally-guaranteed student loans, you may be able to have part of all of your student loan debt forgiven after ten years of service. If your loans are with private lenders, not so much. You may need to forego your ideas of public service in favor of higher-paying work.

If you lose your job or suffer a significant loss of income, federally-guaranteed student loan programs have deferment and forbearance programs in place that allow you to lower or hold off on making loan payments while you get back on your feet. Private lenders are much less flexible in this regard. If you run into real financial trouble, bankruptcy may be your only solution for relief from your private student loan debt.

If you are really hard up for money, private student loans may present your only alternative to dropping out of school. In that case, crunch the numbers, shop around, and borrow the absolute minimum that will allow you to cover your basic expenses. Interest rates vary widely from lender to lender. Check out the Student Lending Analytics Blog to determine if your state allows students to lock in interest rates on private student loans. Credit unions also represent a possible alternative for private student loans – they are often somewhat more flexible with credit terms, and may charge lower interest rates than other private lenders.

There’s rarely a situation where taking out a private student loan is a good idea, and you may just end up with another student loan nightmare. Consider attending a different school if the tuition is too high, or postponing college for a semester or two to raise money. But if you’ve determined that it’s your only option, select a few companies and research each carefully before signing up for anything. That loan will be with you for a long, long time.

This article was written by staff writer Audrey Henderson. Her mission is to help fight your evil debt blob and get your personal finances in tip top shape.
Photo: Nastassia Davis