These days, college diplomas and student debt seem to go hand in hand. With tuition prices continuing to rise, students often have no choice but to take out loans in order to fund their educations. In fact, according to recent data, approximately 69% of 2013 graduatesborrowed money to pay for college, racking up an average debt pile of $28,400.
Here’s the troubling piece of that puzzle though: A good 19% of 2013 graduates who took out student loans borrowed money from private lenders, as opposed to taking out federal loans. Of course, most people who wind up taking out private loans don’t do so because that’s their first choice. Often, those who borrow from private lenders don’t receive enough in federal aid to finance their educations and therefore have no choice but to seek out an alternate means of paying for college. But borrowing money from private lenders can be a scary prospect.
Federal loans have their interest rates regulated so that there are no surprises for those who borrow money from the government to attend college. Private loans work different. With private loans, interest rates can vary from month to month based on market conditions. What this means is that someone who takes out a private loan might start out with a low rate, but over time, that rate can climb, resulting in high, unaffordable monthly payments.
Federal loans come with a certain degree of protection. Those who take out federal loans and become disabled or unemployed, for example, may become eligible to have their loan payments deferred. Those who borrow from private lenders, by contrast, generally don’t have that option, even in the face of documented financial distress.
Furthermore, those who borrow from private lenders can pretty much forget about having their loans forgiven. Federal loans, on the other hand, offer those who enter certain professions, such as teaching, the chance to eliminate some of their loans. Additionally, federal loans tend to come with more flexible repayment policies than private loans. Private lenders don’t usually offer income-based repayment plans.
If you’re unable to fund your college education in full via federal loans, you may want to consider a few alternatives before turning to private lenders. For instance, you might consider deferring enrollment for a year and working full-time to pay for tuition. You might also decide to spend a year or two at community college, where you can knock out some required classes at a much lower price point than what a private college is likely to charge, and then finish up your degree at the school of your choice. Finally, you can try working part-time during college to help pay those tuition bills.
If you wind up having no choice but to take out private loans to pay for college, you’d be wise to try paying them off as quickly as possible once you graduate. It may take some discipline and some serious savings, but the sooner you eliminate them, the better off you’ll be financially.