The average annual cost of tuition, lodging, and board at a public university is $13,600, according to the U.S. Department of Education. That cost nearly doubles for those attending private universities.
From there, neither does it get any better. Federal Stafford loans and Pell grants are available to help with the rising cost of higher education, but for many, they fall short of covering the exorbitant price of a college education. Some students are consequently compelled to accept a variety of financial aid, including private student loans.
The loan of last resort is how people frequently refer to this type of borrowing. Why does it seem like such a bad choice?
Private student loans are typically more expensive than federal student loans in general. The interest rate on any loans you receive from the government is fixed. Your interest rate won’t change whether you pay it off in three years or thirty. On the other side, private loans frequently feature variable interest rates that could increase rapidly over time, significantly raising your entire cost. Some of these loans have interest rates that exceed a stunning 18%, according to The Office of Federal Student Aid.
Furthermore, private student loan interest rates are never subsidized. Therefore, you are responsible for paying any interest fees that you incur. Additionally, if you take out a loan from a private lender, you might have to make payments on the loan even though you are still enrolled in classes. (Federal loan repayment is postponed until you graduate or no longer enroll in school full-time.)
You can incur additional costs in addition to a high interest rate. Private loan interest may not be tax deductible, and prepayment penalties can also apply.
Additionally, be prepared for a more rigorous approval procedure. As with other sorts of loans, lenders look at potential borrowers’ credit report cards, so if you have a strong credit score, you’ll get the best deals. However, if your credit is bad, you can get a higher interest rate or, worse still, be declined. Even if your application is accepted, you might still be forced to have a cosigner on the loan.
If you are approved for a private loan, you should also be ready for a tight repayment schedule from your lender. In contrast, federal loans offer a variety of repayment options, some of which are depending on your income. Additionally, a lot of private loans cannot be combined into a Direct Consolidation Loan, nor can they be temporarily halted or deferred. Furthermore, even if you work for the government, it’s extremely improbable that your lender will forgive the remaining sum of your loan.
The Consumer Financial Protection Bureau may be able to help you if you run into financial difficulties and are unable to repay your private loan. However, if you default on a private student loan, the harm to your credit report will last much longer than the time you were a student at your dream school.