It is common to think of student loans a form of “good debt.” This typically means the sort of debt that Americans take on to pursue secondary education or a college degree. With this debt comes the promise of higher income that would help them pay it off faster.
Yet, there is another term that is getting bad press at the moment. In fact, you may hear more financial advisors say that there is nothing good about private student loans.
What are “private personal loans” anyway? In all honesty, this term can be rather confusing. It is often used as a generic term to refer to the FFEL or the Federal Family Education Loan Program. The FFEL is a government-funded loan plan that is administrated by private companies like Sallie Mae and Wells Fargo.
FFEL loan made the news recently when the House of Representatives pass a bill that that would replace private banking institutions with government agencies who would then handle lending directly.
Yet, there is another type of private loans that are causing borrowers more trouble. These loans operate almost like credit cards, with variable interest rates, sometimes as high as 18% and terms that are set by lenders. These loans offer less protections and guarantees for borrowers than those sponsored by the federal government. Such private student loans have been compared to subprime loans in the mortgage markets.
With the price tag of college increasing faster that the available federal loan money, many more students are forced to rely on private loans to pay for education. Between 2003 and 2008, the volume of private loans increased from $7.7 billion to $22.4 billion.
While Washington is aware of the situation, any progress at addressing the issue is decidedly slow. The question most graduates have is what they can do about their hefty private loan debt. Unfortunately, there isn’t much that can be done yet.
For those who are currently going to school, the important thing is to exhaust every other avenue of federal student loan plans available first. Once private loans become necessary, it is essential to research them carefully to find the best terms.
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