As you enter the world of postsecondary education, you’re preparing to make a lot of significant changes in your life. You might need to move across state lines, you might be entering into a program in which you have little experience, and you might be borrowing money from a financial institution for the very first time. These are big developments to tackle, even just one at a time. But usually they happen all at once in the months leading up to the first day of college.
Considering the vast majority of students will graduate from college with student loan debt, they shouldn’t take their debt burden lightly.
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The likelihood that students would graduate from their four-year degree with student loan debt ranged from a low of 43 percent with debt in Utah, to a high of 77 percent in West Virginia, according to The Institute for College Access and Success (TICAS).
Furthermore, approximately one-fifth of students graduating in 2016 carried private student loan debt. Private student loans, unlike federal student loans, can come with higher interest rates and much lower protections during times of need. The TICAS report compared interest rates between both non-federal and federal student loans, finding a high of 14.24 percent for private loans, to the average of 4.45 percent for federal. Compared side by side, a private student loan can become much more of a long-term burden for students than federal loans.
Considering the possible financial stress a private student loan represents, what should new students consider before taking one on? Although the transition period into post-secondary education can be a time of turmoil, it’s more important than ever before to make wise financial decisions. Sourcing as much alternative financial aid as possible, before accepting private student loan debt, is a critical step.
Find Free Financial Aid
Have you spoken with your school’s financial aid office? They are often the best place to start your quest sourcing funding for your college education. After all, it’s in the school’s best interest to help their students find enough funding to attend. One of the first areas of financial aid to explore is, of course, free money: grants, scholarships, and personal savings.
Do you have any personal savings that could apply toward your college tuition? While not everyone is in the position to save, even putting a couple of thousand dollars into your schooling from personal savings can help.
Secondly, explore what grants and scholarships are open to you. These change significantly from region to region. Therefore, your school’s financial aid office is likely the best place to start looking. Your school, your department, and your state government are all likely sources for possible scholarships. If you are worried about your grades, not all awards are merit-based.
Don’t Forget About the Free Application for Federal Student Aid (FAFSA)
Federal student aid is another excellent low-cost option to consider before moving onto a private student loan. As demonstrated by TICAS, interest rates for private student loans can be 10 percent higher than a federal student loan. Filling out a FAFSA should always be the first step, opening the door to free federal aid or a federal student loan. These loans come with many protections for the borrower that a private student loan simply does not.
The Long-Term Costs of Private Student Loans
Unfortunately, there is little concrete industry-wide data on non-federal student loans. The rates vary widely from one lender to another and can even vary from one student to another depending on their financial circumstances.
According to some recent statistics, however, the average fixed rate private student loan in 2018 had interest rates between 4.25 percent to upwards of 15.18 percent. A variable interest rate was between 3.62 percent and 13.36 percent. Let’s compare that to a federal undergraduate student loan with a fixed rate of 4.45 percent.
If we explore what that means regarding long-term costs, over a standard 20-year student loan term, with a $20,000 loan – how much more does it cost to hold a private loan versus a federal one?
Using the average interest rate of 9.72 percent for a fixed-rate private student loan, you would pay a total of $45,433.56, which if you are doing the math is $25,433.56 in interest alone. In comparison with a federal student loan, you would pay $30,237.88, or only $10,237.88 in interest payments. Your monthly payment would also be much higher with a private loan, $189.31 versus $125.99.
Consider In-School Payments
Although many student loans, both federal and private, offer in-school full or partial deferment options, consider waiving these options in order to make some headway on the loan while attending college. What would four years of no payment progress do to your total owed? Even if you don’t expect to have enough time for both school and job commitments, some loans offer interest-only payments, which can help you keep the overall loan costs down.
Plan to Use the Loan Wisely
The stories you’ve heard about student loan misuse are sadly true; some people do spend their entire loan on partying and non-educational activities. Don’t make the same mistake – taking on a private student loan is a huge commitment with long-term financial consequences. When you are still paying down your student loan debt years after graduation, do you want to look back and regret spending it all on parties?
Because private student loans come with high interest rates and few protections in times of financial hardship, they should never be taken lightly. Use student loans for their intended purpose, for tuition, fees, room and board, and books. Leave the superfluous spending until after you graduate and have something to celebrate.
Make sure to compare the best student loans before you take out a loan to ensure you receive friendly repayment terms.
Author: Jeff Gitlen
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