Things to Look Out for When Taking a Private Student Loan

• Author: Jacob Greene
• Posted: 2024-09-25

When financing a college or other education, there is a high chance that you will need to take out loans. Education has just gotten too expensive for people to be able to afford to pay out of pocket. Of course, your first source of loans will be lower-cost federal loans. However, you are limited in the amount of money that you can borrow from Uncle Sam. This means that you are forced to find other options to fill in the gaps in your funding. Here is what you need to be careful of when you are taking out private education loans.

There are many legitimate private student loan lenders out there. Their offerings are at competitive interest rates and their fees are not that high. These are competitive companies and, just because a lender is not the federal government does not mean that they are not reputable. However, there are lenders out there who make student loans on unfavorable terms.

Many of the Abuses Happen with For-Profit Schools

The issue happens when you either do not have good credit or are choosing to attend a for-profit institution. A school must be accredited in order for a borrower to take out a loan from the federal government. When it is not, or when the federal government loans are not enough to cover the cost of education, borrowers may be forced into the shadow student loan leading market. This is when they are at risk to falling victim to predatory practices.

When you are looking at a potential student loan, the first thing that you obviously must look at is the interest rate. If you are able to borrow from a private lender, the interest rate should be 3-4% above the ten-year federal government Treasury bond. This is certainly a manageable interest rate and will not necessarily put someone behind the eight-ball. However, not every borrower can qualify for one of these loans.

The lender will run a credit check on you. Moreover, many lenders will not fund loans to for-profit schools that are not accredited. The reason for this is that the default rate of students who take out loans to attend for-profit schools is astronomically high. In fact, the number of students who default on these loans within 12 years is over 50%.

This leads to a vicious cycle. Students cannot get any loans for these schools because the default rate is so high so they end up borrowing at very high rates which sets them up to default.

What to Be Careful For When Signing up for Alternative Student Loans

What you really need to be careful of when venturing into the alternative loan market is doing business with the lender that your educational institution sends you to as a referral. Chances are that the two companies are working together, and the for-profit school is getting a cut of the money that the lender is making off of you.

You may get sticker shock when you are presented with interest rates from some of these alternative lenders. Instead of being student loans, many of these loan products are more like usurious payday loans. We have heard stories of lenders charging as much as 36% for these loans. When your interest rate is that high, there is virtually no chance that you will not default on your loan.

The second thing that you need to be careful of is the fees that you are charged on the loan. Even if the interest rate is reasonable, the lender may be charging origination fees that effectively makes the interest rate much higher. You need to read the fine print closely to see what additional fees the lender is trying to add.

You actually want the lender to check your credit before giving you this type of a student loan. If there is a loan given with no questions asked, you can be sure that your interest rate will be sky-high. If the lender is very willing to give you the money, there is a reason for it. Since student loans are not generally disachargebale in bankruptcy, you will be owing the lender money for an eternity unless you can find some way to argue fraud in bankruptcy court.

Make sure that you are dealing with a reputable lender. If not, your education will cost you way more than the sticker price that you are being told.