Another Reason to Avoid Private Student Loans

I thought I knew a lot about private college loans after researching them for my book, The College Solution. But when I read The New York Times this past weekend, I was shocked to learn of another reason why families should try hard to avoid private loans.

In my book, I devote an entire chapter to explaining the perils of private loans. For starters, these loans offer variable interest rates — without ceiling caps — that can ultimately wreak havoc on the budget of a student or parents.

Private lenders can also discriminate. Families which obtain federal student loans are all entitled to the same standard interest rates, but lenders of private loans can be choosy about who gets the best rates. The spread between the starting interest rate for stellar customers versus those stuck with the worst rate can be 10 percentage points or more.

Thanks to the newspaper article, I learned about another serious drawback to obtaining a private student loan. Strange as this will seem, comparison shopping for a private student loan can damage your FICO credit score. Anyone who is contemplating taking out a private student loan this summer, should read the NYT story here.

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