Warning: Personal Student Loans Rarely Make Financial Sense – Forbes | Vette Leader

As federal student loan interest rates rise for borrowers entering college in the 2022-23 academic year, it’s only natural to wonder if you could get a cheaper loan rate elsewhere. After all, private student loan companies still advertise variable rates as low as 1.19% and even fixed rates as low as 3.49%. Because these interest rates are still available, you may be inclined to skip completing the FAFSA and opt for private loans instead.

However, college students and their parents should really think twice about taking out private student loans over federal loans or at all.

The reality is that federal student loans offer significant benefits that you don’t get by borrowing from an independent lender. Also, personal loans make borrowing, borrowing, and further borrowing for a college education much easier or not it’s even worth it in the end.

While personal student loans can be helpful when you actually need them to fund college, they rarely make sense as a first choice. Here’s why.

Lack of access to hardship options

First off, you may be aware that interest rates have been set at 0% and federal student loan payments have been suspended since March 2020. That emergency deferral period, introduced due to the pandemic, currently expires on August 31, 2022. However, the emergency deferral can (and likely will) be extended yet again, meaning borrowers are likely to get even more time with no interest and no payments on federal student loans will.

Like other forgiveness measures, including regular forbearance and forbearance options, offered by the government, this temporary student loan payment holiday only applies to federal loans — not private ones. In fact, borrowers with private student loans have been reliant on payments and interest since the pandemic began.

And while some private lenders have offered short-term forbearance and forbearance options, none have included 0% interest, and none have lasted for years like the federal break.

No loan forgiveness for private student loans

You may also have heard that President Biden plans to use executive action to forgive eligible borrowers a portion of student loan debt in the coming months. The amount forgiven is rumored to be about $10,000 per person with student debt, which would completely wipe out the loans of about a third of student borrowers across the country.

There will likely be income caps on any student loan forgiveness plans that go ahead, but this will limit who can qualify. In any case, it’s more important to note that any forgiveness offered applies only to federal student loans and not to private loans.

Also note that most other student loan plans that result in forgiveness only apply to federal loans. These include teacher loan forgiveness programs, various government loan forgiveness programs for borrowers who work in the public sector, and of course the Public Sector Loan Forgiveness (PSLF).

Income-related repayment only applies to federal loans

Private student loans also don’t qualify for income-based repayment plans, which have become incredibly popular in recent years. Income-based repayment plans like Pay As You Earn (PAYE) and Income Based Repayment (IBR) allow you to pay a percentage of your discretionary income on your loans for 20 to 25 years before forgoing any remaining balances. Truly low-income borrowers can even owe monthly payments as low as $0 on their loans during the program.

It is important to note that amounts waived through this program will be treated as taxable income in the year they are waived, which could result in a student loan waiver tax bomb (which is currently on hold through 2025 and may be extended) . In any case, a personal student loan means that you are not entitled to an income-related repayment at all.

Personal loans make over-indebtedness easy

Most state student loans come with annual loan limits that limit how much you can borrow for each school year. While these caps force you to get creative with college funding, they hopefully lead you to take steps you probably should be taking anyway — things like choosing a more affordable college, earning an extra income, filling gaps in funding in the Closing school, and using savings you have to pay tuition and tuition.

On the other hand, many private student loans don’t have the same caps, so they can make it easy to overspend. In fact, many private lenders will let you borrow up to 100% of the school-certified cost of attending college, minus other financial assistance received.

Personal loans require a good credit rating

Another downside to private student loans is that they typically require good or excellent credit — something college borrowers are unlikely to have. Without a good credit history, you are more likely to be paying interest rates that are on the high side of what student loans advertise online.

Also, 90% of personal loans have a co-signer – simply because the main borrower (ie the student) does not have the credit to be approved by themselves.

Therefore, there are risks associated with this approach. For example, your co-signer is as responsible for repayment as you are, and that can cause problems if you struggle to keep up with your student loan payments in the future.

Luckily, most government student loans don’t require a credit check at all, let alone an excellent credit history. The exceptions are Federal Parent PLUS loans and Federal Grad PLUS graduate loans, which require borrowers to have a reasonable credit history.

Variable interest rates make students vulnerable

Finally, borrowers should know that federal student loans come with fixed interest rates. This means that the federal student loan interest rate remains the same for the life of your loan, although you may have different federal loan rates for each year that you attend college.

On the other hand, the lowest interest rates advertised for personal student loans are usually for variable rate loan products. These variable interest rates fluctuate with market conditions, which can expose students to the risk of paying exorbitant interest rates in the future.

The final result

While personal student loans are easy to apply for and ultimately obtain, that doesn’t mean they’re the best fit for your budget or long-term financial goals. In fact, private student loans offer you far less protection than government student loans, and they can cost more to boot.

Just because a personal student loan offers a lower interest rate doesn’t mean it’s the best choice to finance college.

Make sure you research all your options before borrowing for school and know there will be consequences – good or bad – whatever you choose.

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