According to the U.S. Department of Education, the average cost of tuition, room and board at a public university is $13,600 a year. For students attending private universities, that price more than doubles.
And it doesn’t get any better from there, either. With the costs of higher education skyrocketing, Federal Stafford loans and Pell grants can help with the expense, but for many, these options do not fully cover the extreme cost of obtaining a college degree. As a result, some students are forced to take on numerous forms of financial assistance, including private student loans.
This method of borrowing is typically thought of as the loan of last resort. Why is it such an undesirable option?
In general, private student loans are usually more expensive than their Federal counterparts. Loans that you receive from the government carry an interest rate that is fixed. So whether you pay it off in three years or 30, your interest rate won’t increase. Private loans, on the other hand, often have variable interest rates that could rise steeply as time passes—drastically increasing your overall cost. According to The Office of Federal Student Aid, some of these loans have interest rates that exceed a whopping 18 percent.
Additionally, private student loans are never subsidized. So you’re on the hook for any interest charges that you accrue. And if you borrow from a private lender, you may be required to make payments on the loan while you’re still attending classes, too. (Federal loan repayment is deferred until you graduate or stop being at least a half-time student.)
A high interest rate isn’t the only thing that could end up costly you, either. Interest on private loans may not be tax deductible and there could be prepayment penalties as well.
You should also expect to go through a more stringent approval process. Lenders review potential borrowers’ credit report cards, so as with other types of loans, if you have a good credit score, you’ll get the cheapest rates. But if you have poor credit, you could land a higher interest rate, or worse—be turned down. Even if you are approved, you might be required to have someone cosign the loan with you.
If you do qualify for a private loan, you should also be prepared for your lender to have a strict repayment plan. In contrast, Federal loans have several repayment choices, including a few that are based upon your income. Also, many private loans cannot be deferred or temporary suspended nor can any of them be consolidated into a Direct Consolidation Loan. And it’s highly unlikely that your lender will forgive your loan balance, even if you are employed in public service.
If you do get into financial troubles and can’t afford to pay your private loan, you may be able to get assistance from the Consumer Financial Protection Bureau. But if you default on your private student loan, the damage to your credit report will linger for much longer than the time you spent in the hallowed halls of your beloved university.