Understanding the perils of private student loans

Understanding the perils of private student loans

If you’re thinking about getting private student loans to pay for your education, please be careful. It’s essentially like paying for college with a credit card. (And you know by now not to do that, right?)

By taking out a private student loan, you’re signing up for debt that can go into double digit interest rates and you’ll get fewer breaks if you run into financial troubles down the road. With federal loans (meaning the ones you got by filling out a FAFSA) you’re entitled by law to several different repayment options.

And at least with a credit card you can theoretically declare bankruptcy and have your debts discharged. With student loans, there’s no such luck: It’s almost impossible to get rid of those debts through bankruptcy. (But stay tuned, some folks in Congress are trying to change this.)

It’s certainly understandable why people are turning to these dangerous loans to help pay for their education. College is a huge expense: Private four-year colleges charged on average $26,273 for the 2009-2010 school year, according to the College Board, and public two-year colleges charged, on average $2,544 per year. And that’s just for tuition and fees—they don’t include other basics like books or food. The always-wonderful Mark Kantrowitz over at FinAid.com has a new student loan debt clock that tracks how much we owe. (Hint: it’s more than we owe on credit cards.)

If you’re like the majority of Americans who need assistance paying for college, here are some tips:

Do your best to be frugal first. Hunt down grant and scholarship money, take a job and save up money, and look into affordable options for housing and textbooks.

Stick with federal student loans, like Staffords or PLUS loans. In order to get these, you’ll have to fill out a FAFSA.

Consider borrowing directly from your friends or family. But if you do strike this arrangement, get it in writing with a contract from nolo.com. It’s well worth the $15. (Avoid borrowing from a 401(k)—you can take out loans for education, but you can’t do so for retirement.)

If you’re a grad student, look into Grad PLUS. This is a relatively new program called which allows you to borrow all you need to fund your education. Study the website finaid.com before you make any major decisions. Know what you’re getting into.

Don’t borrow more than $10,000, advises Kantrowitz. He also recommends that you “do not borrow more for your entire education than your expected starting salary after you graduate. Otherwise you will find it difficult to repay the debt and will be at higher risk of default.”

And make sure you do your homework to find the best, most affordable deals you can get. Because long after you’ve graduated, you’ll be stuck with these loans for decades to come.

And my number one rule. Whatever route you choose to pay for your education: never sign something you don’t understand. If you’re confused, post your questions here and I’ll get back to you.

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