Private student loans can seem like a great alternative to federal loans. If you need to borrow more than the current annual federal limits, or if you have expenses beyond the cost of attending classes (vehicle repairs or a new computer, for example), private student loans offer a way to cover those costs without paying out of pocket. For college students, who tend to live on a limited budget, a private loan sounds like a responsible way to pay for necessities without resorting to credit cards. However, taking out private student loans could be the biggest mistake of your college years, with ramifications that reach far beyond graduation.
In the fall of 2004, I was a college senior in a dire financial situation. Between debt payments, commuting costs, and regular expenses, I was struggling to keep up with my classes amongst my constant money woes. I decided something had to change – I was too close to finishing my degree to give up, yet I couldn’t juggle all my financial obligations. I started researching and discovered private student loans – even though I didn’t need money to pay for school, I did need money to allow me to continue going to school. I decided it would be a great idea to pay off my credit cards and my husband’s car with a loan that I wouldn’t have to pay back until I was finished with my education.
Distrustful of big name lenders like Sallie Mae, I chose a relatively unknown lender with great reviews. The FAQ assured me I would be able to consolidate my new private loan with all my federal loans, and my interest rate would never increase more than 5 percentage points above the federal rate. It sounded amazing! All I had to do was convince my dad to cosign and I would have ZERO consumer debt. Problem solved, right?
My Private Student Loan Timeline
October 2004: I received my private loan check for $9500, which I promptly used to pay off all our outstanding debt. Life was good.
November 2004: I received a statement saying I owed $120 on the new loan. Convinced it was a mistake, I called my lender and told them I was still in school. “That’s great, ma’am, but the 200th page of fine print indicated a change in our policies. You have to make interest payments even though you’re still a student.” Um, what?
April 2006: My loan was purchased by a bigger entity who I’ll call Fells Wargo. The new terms included a rolling due date that I could never keep up with, higher interest, and no option to make online payments (though I could pay an $8 fee to make a payment by phone).
September 2006: My husband and I filed for Chapter 7 bankruptcy. While student loans are NOT forgiven in bankruptcy, the private ones are also not immune to penalties related to the bankruptcy. The interest rate on my loan with good old Fells Wargo jumped to 15% even though I never missed a payment.
Present day: I have been repaying my private student loan for nearly 7 years. The original balance was $9500. The current balance? $7,742.85. I have paid over $10,000 toward this loan, yet I haven’t even managed to knock the principal down by $2000. Is something wrong with this picture? Yes, yes it is.
Private Student loans : What You Need to Know
1. Private student loans CANNOT be consolidated with federal loans. When I took out my private loan, I was under the (false) impression that I could consolidate my loans later. My original lender actually stated this was possible on their website. However, this is simply untrue and should be considered before taking out a private loan.
2. Private student loans don’t have to play by the same rules as federal loans. There are certain protections in place for students who borrow from the federal government to attend college. Private lenders scoff at those protections. They are free to raise your interest to astronomical levels, change the terms of your loan without informing you, and pretty much whatever they want. And there isn’t a lot you can do about it.
3. Most lenders do not offer deferment or forbearance options while you’re in school. Just like a mortgage or auto loan, private student loans must be repaid regardless of your status as a college student or your financial situation.
4. Private student loans don’t look “better” on your credit report. A private student loan is basically a personal loan – it’s unsecured, it doesn’t have to be used for school, and it uses your credit score to determine your creditworthiness. When you try to borrow money after taking out a private student loan, banks don’t look at the loan and consider it “good” debt like a federal student loan – it’s just debt, plain and simple.
What You Can Take Away
Private student loans are becoming more popular as tuition rates rise, but they are not equivalent to federal student loans. If you are considering a private student loan, please contact the financial aid office at your university to look at ALL the available options before making a decision. There are many ways to pay for school, including grants, loans, work study, and even taking part-time classes. Despite your best intentions, taking out a private student loan could prevent you from living the postgraduate lifestyle you deserve.