The Perils of Private Student Loans

More college kids are taking out private student loans than ever before.  New federal data shows that the number of undergrads borrowing private dollars has jumped from 5% to 14% in four years.

Why do I care?

Because private student loans can be dangerous.  Private loans are typically more expensive than federal student loans. And while federal loans offer fixed rates, it’s a crap shoot on what kind of interest charges you’ll face over the life of a private loan. Private loans impose variable rates and you can forget about rate ceilings.

Private student loan borrowers also don’t enjoy protections if they experience trouble making their payments. I knew that, but I was shocked when I read a post at the respected Student Lending Analytics Blog. The blogster (sorry I don’t know his or her name) looked at a variety of current private loan promissory notes and discovered that several of the lenders could raise a borrower’s loan margin by 2% or 3% if he or she is late with just one payment! Now that’s frightening, especially for a scatterbrain like me. (I have four sets of keys for my aging Volvo stationwagon and I usually can’t find any of them.)

Even though federal Stafford loans are superior, strangely enough one in four private student loan borrowers in 2007-08 school year didn’t take out a federal loan.

Here’s what Lauren Asher, the acting president of the Institute for College Access & Success says about the growing popularity of private loans:

These data are troubling because private student loans are more like credit cards than financial and have very little in common with federal student loans.

I couldn’t agree more.

If you want to learn more about student loans, check out my book, The College Solution. And please visit my other college blog at CBSMoneyWatch.com.

3 Responses to The Perils of Private Student Loans

  1. Kris May 1, 2009 at 12:10 pm #

    Why is the Parent PLUS loan at 8% considered better than a private loan at 3 or 4%?

  2. Jeffrey Morrison April 26, 2009 at 9:10 pm #

    Hi Lynn and hello Tim,

    I met Tim recently and talked with him at length on the phone. He has a terrific business in my opinion. The information he produces on his blog should eliminate all the mystery surrounding private loans. They are NOT something to be feared, IMO. Just understood, like every other important financial decision we face in our lives.

    Services like Tim’s should remove the fear from such decisions. I am thankful for the information that he publishes.

  3. Tim Ranzetta April 23, 2009 at 7:00 am #

    Hi Lynn,

    Thanks for including information my blog in your recent post. I just thought I would introduce myself. Feel free to delete this comment.

    Regards,

    Tim Ranzetta

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