Be Cautious When Pursuing Private Student Loans
Private student loans have always offered students a beneficial way to supplement federal student loans when they just don’t quite cover all of the college expenses. In today’s economy, however, you must be cautious when deciding on whether to obtain private student loans or not. The high interest rates could come back to haunt you when you begin repayment.
The popularity of private student loans has tripled between 1998 and 2008, and has encompassed 23% of all college loans taken out during that time period (Kiplingers.com). Recently, however, financial experts are starting to shy away from promoting private student loans as a good way to help pay for college. The reason?…high interest rates and fees.
As with most financial institutions in this down economy, private student loan lending has been greatly effected and it shows in the interest rate hikes that students are facing on their loans. It’s important to know that private college loans – unlike federal student loans – feature variable interest rates, so the rate changes based on the LIBOR index and the borrower’s credit score. When the economy is struggling, interest rates tend to go higher and private student loans are no exception. Currently, the average starting rate on private loans is running about 11% according to Student Lending Analytic’s Tim Ranzetta. He goes on to say that this rate will rise an average of 4 percentage points over the life of the loan. Compare these rates to federal student loan interest rates, and there’s no comparison!
Don’t get me wrong, it’s not always a bad idea to shop around for deals on private student loans, but be smart about it. Utilize as much federal funding as possible before considering supplementing private loans. Make sure your credit score is up to par (at least 680) before even applying for a private student loan right now. Furthermore, your cosigner (if applicable) should have a credit score of 700 or higher in order for you to get “decent” interest rates. Also try and factor in any discounts or interest rate reductions that the lender is offering to help make the loan a bit more affordable and worth the cost.
The bottom line is that in tough economic times such as these, everyone has to make sacrifices and this situation is no different. If you find yourself short on money to pay for college tuition or expenses, instead of applying for a private student loan, get a part-time job to help supplement the cost. Additionally, try to cut back on your spending to avoid needing the additional money in the first place. You may need get a little creative in the way you afford college these days, but that’s a sign of the times.
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