Sometimes people say, “do not borrow private student loans.” Many people believe that private student loans have interest that is too high to handle or that people will not be able to pay back the loan.
But to state that people should not borrow private student loans is an overgeneralized statement. Just because some private loans may have a high-interest rate or terms that you don’t think are fair, does not mean that they are all that way.
A bit of side research is needed in order to make an informed decision on private student loans. Once compared side-by-side the borrower may be able to make a better decision than by just going on general advice that could be heard from others.
One reason some people don’t want to use private loans is that they are afraid individual companies may change their policies or report late payments to credit bureaus. However, any default on student loans is reported to the credit bureaus, whether they took out the loan from the federal government or private companies.
Another aspect to think about is the fact that people who say, “don’t borrow private student loans” may be doing so because they want everyone to borrow from traditional federal loan channels. Some of these people may even work for government loan companies. Many people offer information online today and some of them may be resistant to the FinTech wave that is going on today and seek to roll back the clock to the days of subsidized federal loans. This keeps big government in place and there are many who still want this.
The greatest power parents or grandparents have is to direct their own path and help guide a future college student to a solution that will not continue to rack up debt year after year. Thousands of students graduate and discover that it is harder to find a job than they thought it would be and they are left with a student loan that continues to increase over time due to increasing interest rates.
Rather than falling into this trap, check out the options before encouraging students to sign up for a particular type of student loan. Knowledge is power when deciding what route to take.
Disadvantages of Private Student Loans
One disadvantage to private student loans is that there may be very little financial options for forbearances, deferments, or payment arrangements. Federal loan institutions can afford to let students do this because they have larger funding flexibility and access to a large budget from federal funds.
Private loans have to operate within the budget of a private company that cannot afford to lose as much over a 12-month period or wait on payments. When someone says “do not borrow private student loans,” they do not understand the value in considering all options.
Whatever the path someone chooses, remember that the loan will be a part of the student’s budget for a very long time. It’s important to choose wisely.