When looking at getting a student loan, there are some important risks that should be taken into consideration when comparing private versus federal student loans.
For most private loans, it is a given that the interest rates will be higher than federal student loans, and you will not get the perks of being subsidized by the government and having your interest paid for while you are in school. But what other risks are there with private student loans?
With all student loans, both federal and private, it is important to note that they cannot currently be discharged in bankruptcy. So, when considering borrowing for education, it is important to consider the payoff that will be required to repay the loan.
Federal Student Loan Limits
The first risk of private student loans is that these loans have no limits placed on the amount that can be borrowed. It is important to remember that the banks making these loans are out to make money, versus the federal government, whose ultimate goal is to increase the education level of the country. Since the bank’s primary object is money, the bank may not care how much other debt you have.
Meanwhile, federal Stafford Loan limits $23,000 in undergraduate student loan debt, as well as individual amounts that can be borrowed per year. This amount can be well short of the amount of money needed for many private colleges. As a result, many individuals may be forced to take out private loans for an education that they may never be able to afford.
Private Student Loan Marketing
Another huge risk of private student loans is the marketing that big banks are able to put behind their products versus what the federal student loan programs can do.
In fact, last year, a group of college and university associations sued several banks and argued that their lending practices were misleading and actually encouraging individuals to not apply for federal student loans.
While this may be true, it is also true that students are always seeking the easiest way to do stuff. Many banks offer loan applications that take two minutes to fill out, and offer approval in seconds. This is a stark contrast to federal student loans, that have long applications and usually require the assistance of a college or university financial aid office.
Private Loans Don’t Offer the Perks of Federal Loans
Since private student loans are run by banks and not the government, they are not required to offer the same benefits to borrowers as federal student loan servicers are. The programs include student loan forgiveness and student loan deferment. Plus, Federal loans offer free student loan consolidation — yes, free!
Without these protections, borrowers are at a much higher risk of bankruptcy. But, as with all student loans, private student loans cannot be discharged. As a result, individuals can be stuck with this student loan debt for life.
When considering borrowing for college, please make sure that you take into account the total costs of the program.
Readers, what are your thoughts about private student loans?