Private Student Loan
Private student loans are the fastest growing sector of the multibillion-dollar student loan industry. In 2005-06, college students borrowed a record $17.3 billion in private student loans, up 913% from a decade ago.
At a time when the cost of college is surging and financial aid is shrinking, private student loans make it possible for many students to attend colleges they could not otherwise afford. But consumer advocates and student groups worry that the growth of these loans could prove disastrous for borrowers who do not understand the risks.
Unlike federal student loans, private student loans are not guaranteed by the federal government. While guaranteed student loans carry a fixed rate of 6.8%, there are no limits on the interest rates and fees private lenders can charge. Some have variable rates of up to 19%.
Once primarily used by graduate and professional students, private student loans are becoming increasingly popular with undergrads. Nearly 85% of private student loans go to undergraduate students, up from 72% five years ago.
While federal Stafford loans are available to all students regardless of their credit history, private lenders check a borrower’s credit report before making loans. Students who have no credit history, or poor credit, will typically pay higher rates than those with a good credit history or those with a parent who will co-sign the loan. As a result, the poorest students end up with the most expensive loans.
Some major lenders that provide federally guaranteed loans also offer private loans. Other lenders specialize in private student loans. Private student loans have become a necessity for a lot of families.
Borrowers can be drawn to the easy, quick, ‘30 seconds and you will be approved type of approach we are seeing more and more of on the internet.
Moreover, parents are increasingly reluctant to borrow for their children’s education. Over the past decade, the amount borrowed from the PLUS program has grown at a far slower rate than the amount borrowed from private lenders. We are seeing a new generation of parents who want their students to take charge and be liable for their education cost.
Parents in their 40s and 50s are at a place in their life where they are trying to balance the desire to help their son or daughter with education and planning for retirement, and they are really torn. Instead they tend to co-sign a private student loan taken out in a student’s name.
Co-signing typically provides more favorable rates for student borrowers, but it does not get parents off the hook. If the borrower cannot make payments, the parent who co-sign are then responsible.
Because current interest rates are relatively low, rates on many co-signed private student loans are lower than PLUS loan rates. However you may want to keep in mind that private student loans are like adjustable rate mortgages: If interest rates rise, the rates on their loans will go up as well.
Private lenders insist the long-term benefits of a college education are worth the extra cost of a private student loan. Even if it’s at a slightly higher rate, it still helps the students pull themselves up and live the life they want to live.
With all this being said. You do need to make your own decisions and do what is best for your financial situation. Visit our main blog page here