More college kids are taking out private student loans than ever before. New federal data shows that the number of undergrads borrowing private dollars has jumped from 5% to 14% in four years.
Why do I care?
Because private student loans can be dangerous. Private loans are typically more expensive than federal student loans. And while federal loans offer fixed rates, it’s a crap shoot on what kind of interest charges you’ll face over the life of a private loan. Private loans impose variable rates and you can forget about rate ceilings.
Private student loan borrowers also don’t enjoy protections if they experience trouble making their payments. I knew that, but I was shocked when I read a post at the respected Student Lending Analytics Blog. The blogster (sorry I don’t know his or her name) looked at a variety of current private loan promissory notes and discovered that several of the lenders could raise a borrower’s loan margin by 2% or 3% if he or she is late with just one payment! Now that’s frightening, especially for a scatterbrain like me. (I have four sets of keys for my aging Volvo stationwagon and I usually can’t find any of them.)
Even though federal Stafford loans are superior, strangely enough one in four private student loan borrowers in 2007-08 school year didn’t take out a federal loan.
Here’s what Lauren Asher, the acting president of the Institute for College Access & Success says about the growing popularity of private loans:
These data are troubling because private student loans are more like credit cards than financial and have very little in common with federal student loans.
I couldn’t agree more.