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Why Taking out a Private Student Loan is Not a Good Idea

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If you are a student who is looking into a private student loan, then you are at the right place, as the whole idea may not be as good as it actually seems. The clear example below cases a scenario of a former student and includes the problems the individual faced with their private student loan.

Private Student Loan

Scenario

The student graduated in college during the year 2001 with an estimate of $22,000 in student loans. The bulk of their debt was from a federal loan, which was $20,000. The student also had a small $2,000 private student loan. Even though the private student loan was like a tenth of the federal loan, it was actually a bigger headache, which took much more work and effort to be paid off. Without notice, the lender raised the individual’s payment without notifying them and increased the interest rate. In this individual’s situation, the payment amount was not so high, as it was an estimate of $60 per month. The individual considered paying off the total loan instead of facing stressful situations, which would arise every six months.

Luckily and thankfully in this case, this was the only private student loan the individual had. However, private loans can be a total nightmare to overcome, as they are never what they seem.

Rates

The rates are never what they seem to be and can be a little, let’s just say misleading. When you are in this position you may consider a private student loan over a federal loan due to the fact that the interest rates that are advertised are much less. However, this is just something that is shown in advertisements, just to attract people into borrowing. Underwriting is needed for private loans and not federal loans. What this means is that the bank that provides you with the private student loan assesses the risk of loaning you money. Due to this, only those individuals with best credit will be given these low rates. Another problem with a private loan is that the interest rate on it changes and variable rates are offered, whereas federal loans come with fixed rates.

Cosigners Are Being Put At Risk

A cosigner will need to be with a student for a private student loan. What this means is the cosigner, which is usually the parents, will put their credit at risk if their child fails to pay. Due to this, it is important both cosigners and students understand the consequences, as it may seem easy at the start, but just gets tougher with a private loan. If the student does consider a private loan and fails to pay, then the cosigners are in for harassment, potential calls, and a hit to their credit.

Possible Chance of Being a Falling Victim to Trickeries

If you have a few loans from the same lender, then what you will do is pay off the one with the highest rate first. However, the Consumer Financial Protection Bureau (CFPB) has found that some companies may not allow this sensible strategy. It was also found by the CFPB that servicers usually divide the overpayment and relate it to the unpaid loans, which as a result takes the borrower much longer to pay back the loan.

Another problem arises for those borrowers that fall back on payment. The lender will always say to the borrower to pay how much they can afford, but will not let them know that at the same time they are adding to all the loans, and not just the one with a high interest. This can have a negative impact on a borrower’s credit and at the same time develops penalties and late fees the lender places on the borrower.

Higher Limit on Lending

Regardless of whether you are in the position to fund the whole cost of your education with multiple loans or not, this really does not mean that is something you should do. If you choose to take out higher loans, this means the interest on that loan will also be high. With more interest, you will be paying much more on your loan than the overall amount that you took out.

Your Loan Depends On Your Credit Score

If your credit score is low or nonexistent, then you may be at a disadvantage. If you are in this situation, then you may also find it difficult to get the loan and if you are lucky, then you may only be able to acquire one loan with some ideal terms. These include fees, less flexible repayment plans, and high interest rates.

The Bottom Line

If you want some help with college costs and wish to make them possible, then a private student loan can be possibly helpful. However, if a student choses a federal student loan, they will face a better experience and one that is much safer to the private loan.


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