Private Student Loans: Should You Use Them?

All right, hombres y mujeres — today we’re going to talk about private student loans a little bit, since I promised you yesterday that we would. We left off yesterday with Marissa’s story of telling us about her college cutting her off from student loans because she’d already funded her cost of attendance.

I advised she get cozy with the financial aid folks, show documentation of her especially high living expenses, and hope they agree she’s got enough hardship action going on to let her take out some more loans.

This post is about private student loans. These are Private Eyes. Tina Turner was a Private Dancer.

Let’s hope that works, but let’s be honest, it may not. In that case, she can go with private student loans — or, as they’re sometimes known these days, “alternative student loans.”

What’s a private student loan? Simple — a school loan you get from someone other than the government. Namely, a bank.

Good news: There are lots of private student loans available if the feds are cutting off your student loans.

Bad news: The interest rates are higher, and unlike federal student loans, your creditworthiness is taken into account with private loans — just like any other loan a bank makes. And if you want the best rates, you’re also going to need very creditworthy cosigners as well.

(I’m not going to turn this post into a giant treatise on the ins and outs of private borrowing because those exist elsewhere on the Web, but if you guys want one of those, let me know in the comments.)

Forgive me if this feels elementary here, but every time you’re considering taking out a loan, take some time to consider the nuts and bolts of what you’re doing, giving special emphasis to the amount.

If you want to take out a $10,000 private student loan for living expenses, understand that you will have to pay someone back $15K (after interest) over a relatively short repayment period.

$15,000 is not chump change, even if you’re in a high-paying profession. I emphasize this because millions of students do this funny little mind trick thing to themselves that minimizes their perception of the debt, and therefore leads them to take on more student loan debt than they otherwise would.

Here’s what they do (hey, I’m not judging, I did it, too): They look at that student loan debt number in their heads, and then right next to that number, they see their projected annual salary. And the salary number is usually much bigger, and so they scoff at the idea of such a relatively (to their projected income) low amount of student loan debt being able to present them with any future financial difficulty whatsoever.

Or, more plainly stated: When you think about $30,000 in loan debt vs. a $50,000 annual salary, it seems like nothing. Nothin’ to worry about at all!

But then everyone realizes, a few years later when you’re paying down the debt, that hey, shit, this is a lot tougher to pay down than I thought it was gonna be, with living expenses and all. And if you have kids — well, multiply those living expenses, to be sure.

You should not interpret this post as my advising you NOT to take out private student loans. By all means, take them if you need them, and I say that to everyone without reservation or condescension.

But I just want you to thoughtfully consider whether you need them enough to take such a large amount of money from strangers and then be obligated to pay it back over a number of years.

Whether they’re private or federal loans, that’s always the primary issue for me. With private loans, you’ll need to take them into account even more so, since the interest rates are higher (and therefore the total amount you pay back will be as well).

— That’s all from me today. What about you guys — anyone taking/took private loans? Anything to say about them? Let us know in the comments below.

5 thoughts on “Private Student Loans: Should You Use Them?”

  1. I see so many people get into the student debt trap. I know a girl who has over $100k, most of it in private student loans from Sallie Mae. She went to a private undergrad, studied abroad twice, and got her Masters in Comparative Literature Scotland. She works in local government making $25k per year, roughly. She can’t afford even the interest only payments on 9% interest. She is really in a pickle. She needs her PHD to get a decent salary, and that means MORE debt. It makes me so grateful that I was able to get my Bachelors with no student debt, and that I won’t need to get into debt for my Masters, even though tuition for an overseas student is 6,600 pounds, or roughly $10k. I lived very frugally over the past few years, but I’ll have the financial freedom to experience more in the future.

    1. I wished I could say the same. I worked most of my life in low-paying jobs. Just last year I was laid off from a good paying job and found myself on unemployment, I then thought about going to college. I went through the process and signed up with Berkeley College (love it). I graduate in 2012 with a bachelors degree and I will owe $42000. Not including a loan I took out to go to a business school. Now I will owe $55,000 when I graduate and if I don’t get a job that pays at least $60,000 yr, I don’t know how I will pay off this loan. I don’t want to give up the chance of getting my degree this is a chance in a lifetime, but the question is can I afford it. ( Maybe/ Maybe not). I don’t know right now I am hopping for a miracle along with a scholarship to come along and help me out.

  2. Drowning in debt

    DON’T DO IT! I will say two things about private student loans.
    CON: They’re not as flexible with payback:
    The banks will put you in default after 3 missed payments, and they will not let you out without paying the full thing off. They can make you start paying back immediately and not wait till you’re done w/school! Many banks sell their loans immediately to private collectors and those are RUTHLESS. They will take you to court and try to take your home, garnish your wages etc.

    PRO:They are easier to dismiss
    HOnestly, my lawyer told me that with my cosigner having hard times since his wife died he is going to claim bankrupsy. Even though it is an “education loan” it can still be claimed under bankruptsy if it’s not federally backed. This is a bold move because you must prove you aren’t able to pay it. Most of these collectors won’t accept reasonable payments and insist on getting like, $300-500 per loan per month minimum because they don’t want to wait to get their money. that’s the only plus. Since they aren’t willing to work with you then if you go to bankruptsy and really qualify for it, (both you and your cosigner) then you can get out of them. I hate the concept, but if they refuse to work w/you, you’re credit will be destroyed anyways.

    For me, my credit is gone. They destroyed it. I became disabled and had put myself through school using private loans every year. I had to get $10k each year to pay off school. So I am now in almost $100k debt and over half of it is not federally backed. I would say only take these loans out with great research and only if you absolutely can’t make it any other way.

  3. Private loans saved my college career. Because of the amounting “pay immediately” debt my parents got into because of Plus Loans, I had to stop taking them my second year, and due to our actual income level, I didn’t receive much in federal loans, not near enough to cover what I needed to get through school. With good credit and or a good cosigner, the interest rate becomes much more favorable. BUT, you have to, HAVE to take loans wisely. DON’T take a ton of money, thinking you should probably have spending money to go out to eat every week and catch three $10 movies every weekend. Cover your most important expenses, and if you feel you need to, a budgeted amount of money to support yourself if you’re not working or something like that. You’ll be glad you did when your loan payments don’t eat half your paycheck.

  4. Before one applies for the loan one should think twice of how to repay it since paying loans not only for school fees it really needs one to budget properly otherwise one can end up being actioned what you have. even if you are taking a competitive proffession like medicine do not count the chicks before they hatch.
    Good day

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