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.
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.