College Financial Aid: Why You Should Avoid Private Student Loans
Student loans are available in a wide variety of types, with the most common being Stafford loans and Parent PLUS loans. If you ever go to school out of state or at a college with really high tuition, you may be offered a private student loan. Typically a private student loan is offered when your scholarships, grants, and other student loans do not cover your full tuition.
My Experience With Private Student Loans in College
I attended college out of state and did not have enough to cover the out-of-state tuition when I was earning my undergraduate degree. Since I did not have a parent that would take on a Parent PLUS loan, my college financial aid office offered me a private student loan, which was called a Signature Student loan. I was told that the interest rate would be variable and that it would be higher than the Stafford loans. Faced with the possibility of having to quit school, I took the Signature Student loan that semester, and the next two as well.
I wish someone had warned me against those private student loans. Their higher interest rate is not the only bad part about them.
Private Student Loan Interest Rates and Consolidation
As of January 2011, the current rate on my private student loans is 9.5% while my consolidated Stafford loans are 2.65%. I attempted to consolidate my private student loans a few years ago with no success. Apparently it can be done, but only if you have a top tier credit score and pay a fee for the consolidation.
Overall, you end up paying a LOT more in the long run for your private loans. And honestly, they were just not worth it. It would have been better for me to only go to school part time and take longer to get my degree instead of going full time and having to take out these extra loans.
No Deferment for Private Student Loans
When I started graduate school, I expected my private loans to go into in-school deferment like my other student loans. They did not. When I called Sallie Mae about this “error” I was informed that I could pay a fee, which was around $200 if I recall correctly, to temporarily stop the payments but that there was no in-school deferment for these loans.
I also cannot change the payment plan, get a hardship deferment or forbearance or get a temporary stop in payment for being unemployed. All of these things can be done with my Stafford loans. In fact, the only positive to private student loans is that you can get rid of them in a bankruptcy, if you are unfortunate enough to find yourself in that type of financial situation. With Stafford loans, you cannot get rid of them in a bankruptcy.
Avoid Private Student Loans If You Can
If you are ever offered a private student loan by your college financial aid office, do what I should have done – get an extra job to pay your tuition, even if you have to go to school half-time or put it off for a semester. Otherwise, you'll be like me – watching your student loan interest rate and hoping that it stays below 10%.