Funding a college education is increasingly out of the reach of most people without financial help.
And while the Federal Government has some very beneficial loan programs that are easily managed and designed to help, do not fall into the trap of borrowing from a private lender if you need extra funding during your studies.
Here are 6 reasons why …
1) Repayments Can Begin Right Away
Unlike loans within the government financial aid packages, private student loans might require you to start repaying the loan while you are still studying. This means you will have to get a job, taking time away from your studies and potentially defeating the purpose of the loan in the first place.
It will also add unneeded stress to your life, which could impact on your performance in class.
You do not have to start paying back a federal loan until you graduate or otherwise leave school.
2) Interest can be High and Variable
Federal student loans are regulated so you will never get high interest. In fact, you’ll get some of the best interest rates of any loan and this rate is fixed for the entire duration of the loan. This makes it easy to stay on top of.
Furthermore, if you meet certain financial need criteria the government may even cover the interest for you while you are in school, so the balance never rises.
Private lenders can set much higher interest rates and the rate can be variable (i.e. it can increase). This means you might end up paying much more in the long-run. You will also be paying interest from the start of the loan with no subsidizing.
3) They Are Less Forgiving if you’re Struggling
Federal student loans are designed specifically to support students and help them into the careers they desire so they become effective contributors to the economy. If you are struggling to make repayments, you may be able to freeze the loan for a period of time and even lower the repayment amounts.
This is not the case with private lenders. If you’re struggling and fail to pay, you might default and end up with collection proceedings and a black mark on your credit report.
4) Repayment may Not be Tied to Income
Federal student loans are often tied to your income level, meaning you only ever have to repay what you can currently afford. If you lose your job, you may also be able to defer payment until you are back at work.
Private lenders are not obliged to do this and you could end up allocating most of your wages to repayments, leaving you little to live on or socialize with. You’ll still have to pay whether you have a job or not.
5) There are no Added Perks
Federal student loan packages come with all sorts of other perks that you won’t get from a private lender. For example, if you end up working in a government role or for a public service, a percentage of your student loan may be wiped. No private lender is going to wipe your debt because you get a certain job.
Federal loans also have no prepayment penalty fees, they can be easily consolidated with a direct consolidation loan, interest may be tax deductible, and there are no credit checks (excluding the PLUS loans). Your credit score also tends to be protected with federal student loans.
6) You might not Need it
Just because you are a student, don’t get roped into taking out another ‘student loan’ (often a large sum), because you think that’s all that’s available.
If you are struggling with living expenses or other costs, but the bulk of it is covered by a Federal loan, consider getting a part-time job, borrowing from friends or family, or even taking out a small payday loan of $1000 or less via a site like WeGot1000.com to tide you over.
Education should always be seen as an investment – research suggests graduates earn an average of $20,000 more than those without a degree. However, private student loans are not designed to help like federal student loans and are solely based on profit. If you are in dire need of extra funding, it’s important to weigh up your other options.