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Private Loans: Proceed with Caution

As students figure out their post-secondary options, paying for college and the various options available can be overwhelming. Students who may be the first in their family to attend college or those that come from low-income families may be more susceptible to predatory lending practices such as expensive, high-interest private loans. Since undocumented students do not qualify for federal financial aid, private loans may be one of the few ways they can pay for college. 

When considering private loans for college, it is important to make sure that students are researching their available options thoroughly before committing to anything.

Student loan debt is on the rise. Among the Class of 2019, 69% of college students took out student loans, and they graduated with an average debt of $29,900, including both private and federal debt. Meanwhile, 14% of their parents took out an average of $37,200 in federal parent PLUS loans.

For banks, private loans help to generate revenue and help them make money. Recent lawsuits uncovered that some lenders provided subprime loans to students with poor credit who were likely not able to repay the loans.

Risks with High-Interest Private Loans

Private loans differ greatly from federal loans. It is important to understand these differences before committing: 

  • No Maximum Borrowing Limits: Unlike the federal loan programs, banks do not often provide a cap to how much a person can borrow. This can lead to students and families taking on too much debt to attend college. Additionally, private loans often come with variable interest rates which can change over time. Federal loan terms are the same to all borrowers, but private lenders can charge higher rates to those who need the financial support the most. 
  • Limited Protection or Perks: Private loans are not required to offer the same protections that are found with federal loans. For example, borrowers of student loans have the right to defer repayment if they fall on economic hardship or unemployment. 
  • Inflexible Repayment Options: Since private loans are run by banks, they can set the terms of the repayment options. A single missed or late payment could automatically put a borrow into default. Federal loans provide up to 270 days of non-payment before being considered in default. 



Adapted from: Loans ‘Designed to Fail’: States Say Navient Preyed on Students, The New York Times, April 9, 2017.