Private Student Loans: Selling Your Kid Up the River

I want to share part of the conversation that I had today with Barmak Nassirian, an official with the American Association of Collegiate Registrars and Admissions Officers. I am doing research for some stories on college so I called Barmak because he is one of the truly thoughtful and compassionate financial aid experts in the higher ed world.

Barmak noted that parents with teenagers are being rocked by a perfect storm. Parents are losing their jobs, their college accounts are decimated and their home equity — which might have normally been a source for tuition payments — has been decimated. That’s should hardly be a surprise to families.

Barmak observed that parents and students need to be much more engaged in selecting colleges that are academic and financial fits. (That happens to be one of the main themes of my book The College Solution.) They also need to be careful about the amount of debt they are willing to let their kids take on.

I totally agree with him that it’s unconscionable that parents are so willingly to let their kids assume huge amounts of private student loan debt, which is usually the worst alternative.

While there is a lot of moaning in the media about how there’s less private student loan money available due to the credit crisis, what routinely gets overlooked is that most parents have access to unlimited federal money through PLUS loans. The federal parent loans are vastly preferable to private student loans.

I’ve always been puzzled about why so many families have made their kids take out these predatory private loans instead of turning to parent PLUS loans.

Here’s what Barmak’s said:  “There is no rational justification to borrow through private loans when the federal government provides unlimited borrowing.”

“Why in the world,” he asks, “would a family take a more expensive, more predatory and more merciless route?

Barmak noted, however, that parents are aware of the burden of debt on their own lives. They are unwilling to take on what might be the financial equivalent of their current mortgage because they don’t want that financial albatross when they are in their fifties or sixties.

Yet these same parents don’t hesitate foisting that burden on their kids. Parents are far too optimistic about what kind of debt their kids can handle. “It’s very easy to be unrealistically optimistic for a child,” Barmak observed.

Unfortunately kids have no clue to what they are signing up for. They are just eager to start attending their dream school.

It’s a very serious problem.

Learn how to select the best student loans by reading The College Solution.

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