The New York Times recently ran an interesting article about students using private loans to pay for school. Education costs are getting more and more costly each year. Unfortunately for American students, the amount of federal financial aid stagnanted. As a result many students are turning to private lenders to fund their education.
According to the College Board, private student loans have tripled in growth in the past five years. During the 2005-06 school year, American college students borrowed $17.3 billion from private lenders. Unlike federal loans that have mandated interest rate, private loans carry rates that can reach up to 20%. Additionally, private loans don’t have limits to the amount of debt students can take on like federal loans do. Consequently, many young people are overextending themselves.
Last month, it came out that private loan companies like Sali Mae were basically paying off schools to steer students towards high interest rate loans. Many students would go to their school’s financial aid office thinking they were getting low interest federal loans. It isn’t until they graduate and start getting their bills do they realize that they actually received a high interest private loan.
Another problem with private student loans is that the rate is variable. Unlike federal loans which are locked in at a low rate, private lenders can change their rate whenever they want. Many students go into private loans thinking they’ll have one rate, but a few years down the line, they might see themselves paying more.
What Can You Do to Avoid Being Swindled?
There are few things you can do to avoid the private loan bait and switch.
- Ask what type of loans you’re getting. Don’t assume just because you fill out a federal financial aid form you’ll be getting just federal loans.
- Read the paper work clearly. Before you sign anything, make sure to read the paperwork. Make sure that you’re just receiving federal aid and not private loans. If you have any questions, ASK them.
- Take the least amount of private loans as possible. If you do have to dip into private loans, take the least amount as possible. Learn to stretch your dollar. Live frugally.
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[tags]New York Times, student loans, debt[/tags]