Stay Away from Private College Loans

I was visiting my daughter, who attends Juniata College in Pennsylvania, for several days, which mercifully allowed me to escape the tragic San Diego fire, the miserable air and those cursed Santa Ana winds. Now that I’m back, I’m furiously trying to finish my book, The 99.8% College Solution by December. The book is focused on helping the kids, who don’t make it to the Ivy League, get a great education for an affordable price. And 99.8% of kids fall into that category.

It’s only fair that these kids get a book that addresses their needs since the vast majority of titles are devoted to the measly .2% of students who actually attend Ivy League schools. The angst that this tiny group of schools generates is mind boggling and completely unnecessary.

I’ll share more about the book later, but for now, I want to mention just one of the topics that I’ve been writing about. What I find particularly scary is how few families know how to shop for student loans. Federal loans are superior to private ones, but plenty of families don’t understand this. And unfortunately, colleges and universities often do a miserable job of explaining this.

Here are two reasons to avoid private loans:

Private loans charge variable interest rates. Anyone with an adjustable rate mortgage already knows why loans without ceiling caps can be perilous. A loan with runaway payments can wreak havoc on a student or parents’ budget. Many people don’t realize that the beginning payment, which may seem manageable, will change because most private loans include variable interest rates that don’t include a ceiling.

Private lenders can discriminate. Unlike the federal loan programs, lenders who market private loans can pick and choose their customers. Families with excellent credit can obtain better starting interest rates than those with average credit histories or worse. The less fortunate borrowers can get saddled with loans that are as bad as the subprime mortgages that helped puncture the housing bubble. The spread between the starting interest rate for stellar customers versus those stuck with the worst rate can be 10 percentage points or more.

What’s more, the interest rates and fees of private loans can vary from school to school. Some lenders will take into account a school’s overall loan default rate. So even if you have a pristine credit history, you could still get punished. How’s that for being unfair?

For those who are bored by my college posts, I promise to lay off on this topic for awhile!!!

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