What to look out for before taking out a personal student loan

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Why do people take out private student loans?

The cost of attending college has risen sharply, with the annual price including room and board exceeding $18,000 for a public college and more than $47,000 for a private one.

There are limits to how much students can take on federal loans — the maximum amount a student can borrow in a year is $12,500 — and so many are turning to private financing to meet their bills.

As a result, the $130 billion personal student loan market has grown more than 70% over the past decade, according to the Student Borrower Protection Center.

Americans owe more on personal student loans than past due medical debt or payday loans.

Should students ever borrow through private lenders?

People should consider taking out a private loan if they have reached federal student loan limits and still need education financing, Kantrowitz said.

But, he added, “Borrowing personal loans can be a sign of over-indebtedness, so you should do so with caution.”

A rule of thumb is that college students should not borrow more than what they expect to be their starting salary.

You can look up average annual earnings for various occupations on the US Department of Labor website.

Here’s what else to consider…

Government student loans offer a variety of protections, including forgiveness programs and interest-free forbearance, that most private student loans do not offer.

Most recently, during the Covid pandemic, federal student loan borrowers have been able to hit the pause button on their payments without accruing interest for nearly two years. This relief has not been extended to personal loans.

“There is also the prospect of broad student loan forgiveness that may be limited to federal loans,” Kantrowitz said.

“We almost always discourage personal loans,” said Betsy Mayotte, president of the Institute of Student Loan Advisors, a nonprofit organization.

“If you can’t make the payments, the lender can sue to get access to wage garnishment, confiscation of assets like bank accounts, and that applies to both the borrower and the co-signer.”

As Mayotte pointed out, many private lenders require students to have a co-signer who is equally liable for the debt.

If there are payment difficulties, both are on the hook.

“I hear weekly from borrowers and co-signers who can’t afford the payments and there are just no options I can give them,” Mayotte said.

Private student loans are available with fixed and variable interest rates.

“In general, in a rising interest rate environment, borrowers should prefer a fixed rate, even though variable rates may start lower,” Kantrowitz said. “Floating rates can only go up.”

In any case, the interest rates on the loans can be expensive.

“I’ve heard of rates as high as 18% on private student loans,” Kantrowitz said.

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