Published in: Student Loans | Nov. 4, 2019

The $119.31 Billion Risk College Students Are Taking

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Not all student loans are created equal, and knowing the difference could spare you a world of financial pain.

Borrowing money for college is a common practice, which explains why Americans owe an astonishing $1.59 trillion in student loans. But according to The Ascent’s recently published Student Loan Debt Statistics for 2019, the number of borrowers who take out private loans for college has been increasing year over year. 

All told, Americans owe $119.31 billion in private student loans. And although these loans only represent 7.71% of all outstanding U.S. student loan debt, that number is unsettling for a number of reasons.

College students in a busy campus stairway.

Image source: Getty Images

The problem with private student loans

Private loans don’t follow the same rules as federal loans. The result? They're less friendly for borrowers. 

Take interest rates, for example. The higher the rate that's attached to your loan, the more it costs to repay it. Federal student loan interest rates are capped, and they're fixed over time. Private student loan interest rates aren't regulated, so lenders can charge whatever they want. And often, they use that as an excuse to charge a lot. Plus, private student loans often come with variable interest rates, which means that even if you start out with a lower rate, it could easily climb while you’re in the process of repaying your debt. 

Now let's talk repayment. With federal loans, you're privy to a host of remedies if you find that you're struggling to keep up with your payments. You could apply for an income-driven repayment plan, or even defer your payments for a period of time, depending on your financial circumstances. Private loans, however, don't come with these built-in protections (although it is worth noting that private lenders will sometimes work with you if you need to negotiate your payment terms). 

Now, you may be thinking: "If private loans are so terrible, why not just stick to federal loans?"

The problem is that federal loans are capped at preset amounts that fall well below the average cost of college tuition. In fact, undergraduate students who are also dependents are limited to $31,000 in federal borrowing throughout their undergraduate studies. That's not even enough to cover the average cost of tuition and fees at a four-year, public in-state school. As such, many students borrow privately to fill that gap, and regret it after the fact. 

Know what you're signing up for

If you're going to borrow privately for college, do so with caution. First, understand the terms of your repayment period. Most private lenders don't make you repay your debt while you're still pursuing your studies, but some do, so pay attention to when your first payment is due. 

Additionally, you'll want to see if your loans come with a grace period post-college -- a period during which you don't have to make payments right away upon graduating. That would give you some time to land a job and actually have the means to pay off that debt. But not all private loans come with a grace period, so be careful. 

Also, pay attention to whether your interest rate is fixed or variable. If you're dealing with the latter, prepare for your monthly payments to go up over time. 

Finally, before you borrow privately for college, be sure to exhaust all federal borrowing options before giving private loans a look. It also pays to find creative ways to pay for college to minimize your private borrowing. That could mean working part time during your studies, or even crowdfunding part of your education. The latter is more of a long shot, and it does mean really putting yourself out there, but if it saves you a few grand in loans or interest over time, it's worth a try.

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