Five Things to Know About Private Student Loans

The U.S. Federal Reserve estimates that Americans today owe between $900 billion and $1 trillion in college student loan debt. And that figure has been steadily growing since the 1980s. Other estimates put the total amount of student debt at $1.5 trillion, with the average American leaving college owing more than $30,000 in personal student loans (parents take out an average of $35,000 in loans to help pay for their children’s education).

It takes many people a lifetime to pay off their student loans. The Consumer Financial Protection Bureau states that there are 2.8 million Americans over the age of 60 carrying outstanding student loan debt, and they collectively owe more than $65 billion. Given the huge impact of student debt, it is important to give careful consideration to any loans you take out when entering college or university. As is often the case, the details can be found in the fine print of student loan contracts.

Here are five things to know before taking out a private student loan.

1. Student loans can be part of a school’s financial aid package

Most people assume that student loans are separate from financial aid. Student loans are a debt that must be paid back, while financial aid consists of grants and awards such as scholarships and bursaries that do not need to be paid back. Sadly, this assumption is often wrong.

When colleges and universities offer a financial aid package to a student, it often includes a combination of both grants and awards, and student loans. And those student loans are often managed by private companies, not the college or university you are attending. Unfortunately, far too many people find this out only after they have signed to accept a financial aid package – realizing they have been saddled with costly student loans. This is an unfortunate situation that can be avoided by carefully scrutinizing any financial aid package you are offered.

Be sure to identify and distinguish between scholarships and bursaries that are essentially free financial help and loans that must be paid back with interest.

2. Ensure the student loan contains a “grace period”

Many student loans do not need to be paid back immediately upon graduation. Loans from established lenders often come with a grace period that’s typically six months to a year in duration. During the grace period, you will not be required to make any student loan payments. The grace period exists to allow you to find gainful employment and begin earning an income after graduating.

However, many lenders do not offer a grace period and will require you to start repaying your student loans right after you graduate. Either way, you will want to know ahead of time if the student loan you take out provides a grace period after graduation. The grace period can be a big help when it comes to getting on your feet once you have your degree in hand.

3. Don’t borrow more money than you need

How much money do you really need to borrow for school? This is a critical question for everyone to ask. Many financial experts recommend that you do not borrow more money in loans than your starting annual salary. So, if your starting salary is likely to be $75,000 a year, that should ideally be the limit of your student loans.

Of course, borrowing less is always advisable if possible. But taking out loans that are bigger than your annual salary can really put you behind the eight ball when it comes to debt and could result in you taking years longer to pay off your student loans. Be careful and do some research about your chosen profession before pursuing a degree in it. Know what the salary range is, and what your starting salary is likely to be. Crunch the numbers and take out only the student loans you will be likely to repay quickly once you begin working.

The bottom line is that you should not take on more student loan debt than you can handle.

4. Know the difference between a private and government student loan

There are two types of federal student loans available in the U.S. By federal student loans, we mean debt that is issued by the government. This is not to be confused with private student loans that can be taken out with banks and other financial institutions.

Federal student loans are generally preferred as they come with lower interest rates and more favorable repayment terms. In the U.S., the two types of student loans are “subsidized” and “unsubsidized.” Subsidized student loans are for people who also receive financial aid. With these loans the federal government pays the interest while you’re in school.

Unsubsidized loans are available to all students regardless of financial aid received or your financial need. However, with unsubsidized loans, you are required to pay all the interest on the loan – even while you’re taking classes in school. Student loans issued by private companies are similar to unsubsidized government loans in this respect. Obviously, a subsidized loan where the government pays a portion of the interest is the best option. Unfortunately, not everyone qualifies for this type of preferred government loans.

You’ll want to know exactly which type of loan you’re taking out and the terms of interest and repayment.

5. Beware of penalties attached to student loans

It is extremely difficult to get out of repaying student loans. In fact, student loan debt is probably the most unforgiving debt you will take out during your life. We say this because while most debts can be dissolved through bankruptcy, student loans cannot. Student loans are with you for life or until you pay them off in full. The only way to get rid of student loans is to pay them back. And if you cannot pay them back, or miss too many payments, private lenders can garnish your wages to repay the debt.

For these reasons, it is critically important for borrowers to ask themselves: What happens if I can’t repay my student loans? Being aware of the answer to this question should help ensure that you do not take on more in student loans than you can afford to repay. It is always best to make your student loan repayments on time and consecutively. If you don’t, the penalties can make things a lot worse. The best advice is always to repay your student loans as quickly and efficiently as possible since it is debt that you cannot get out of any other way.