Private Student Loans: What Lenders Won’t Tell You

by Broke Professional on August 31, 2011 · 8 comments

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.

{ 8 comments… read them below or add one }

1 20's Finances August 31, 2011 at 9:03 am

Wow – that’s a horrible story. On the other hand, it offers great advice to your readers. Great post. I was fortunate to graduate debt free – but I was lucky. Picking up debt for school is all too popular these days and this advice is much needed.


2 Financial Success for Young Adults August 31, 2011 at 10:07 am

Yes, private student loans are the worst. Especially when there are so many opportunities for grants and scholarships.


3 Jeff @ Sustainable life blog August 31, 2011 at 12:35 pm

Im glad that I didnt take out any private student loans. The only one’s i’ve got are federally backed, but managed by someone else. They are awful, from everything i’ve heard about them. This is no exception.


4 Maggie@SquarePennies August 31, 2011 at 4:32 pm

This is so good that you pointed this out. So many private loan offers come in the mail & make you think they are somehow affiliated with the federal loans. Students need to talk the financial aid office at college to get the real facts! They can save themselves some real headaches down the road!


5 SB @ One Cent At A Time August 31, 2011 at 10:34 pm

I recently posted on similar topic, there are so many other scholarships available these days, we should not go for private ones. Apart from govt. there are many trusts that operate scholarships, my advice would be to research on all other alternative before going for private scholarships.


6 retirebyforty September 1, 2011 at 2:08 pm

What a nightmare! Hope you can get it settle soon.


7 Shaun @ Smart Family Finance September 4, 2011 at 6:19 pm

I think that much of what you said is right on and students should only go with private loans once government loan resources are exhausted. Also, many of my friends with private loans have struggled to get forbearance from private lenders when they needed it and were reasonably justified.

That said, I think it is important to note that with any loan, you get what you sign. I have two private student loans. All of them were fixed rate loans. All of them were completely deferred and could go back in deferred status so long as I was a full-time student. A few of these loans are even lower interest than some of my Federal loans. Government are also considered personal loans on your credit report.

Surprisingly, there are a few, key word few, lenders that will consolidate private student loans. I believe Chase has one.

My only complaint is that I only have ten years to pay the loans back, but that is something I knew going into the loan.

One thing to watch out for though, during the health care bill passage another bill was passed that ended government guarantees for private student loans and I suspect that anyone interested in a private loan will need to read all the fine print very carefully.


8 Julie @ The Family CEO September 6, 2011 at 2:55 pm

Over $10,000 paid and the loan reduced by less than $2000? That makes me sick to my stomach for you. Thanks for this cautionary tale. I’ll be linking to it in my next Personal Finance Roundup post.


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