Private Student Loans Have Questionable Variable Rates
Private student loans are the fastest-growing division
of the multibillion-dollar student loan industry. In
2005-06, college students borrowed over $17 billion in
private student loans, up 913% from a decade ago. Many
private student loans are not eligible for student loan
consolidation however. With interest rates at record
lows, student loan consolidation offers the opportunity
to lock in a low interest rate for the life of the loan.
The rates on private student loans are generally
variable interest rates which mean that they can change
at any time, even while you are still in school. At a
time when the cost of college is increasing and
financial aid is decreasing, private student loans make
it possible for many students to attend
colleges they
otherwise couldn’t pay for. Many worry that the growth
of private student loans could be detrimental to student
borrowers who don't understand the risks.
Federal student loans are guaranteed by the federal
government, while private student loans are not.
Guaranteed student loans carry a fixed interest rate of
6.8%; there are no fixed limits on the interest rates
and fees private lenders can charge on private student
loans. Some private student loans have variable rates of
up to 19%.
Private student loans used to be mainly for professional
and graduate students, but they are becoming
increasingly popular with undergrads. Over 80% of
private student loans now go to undergraduate students.
Federal Stafford loans are available to all students
regardless of their credit history, but private lenders
check a borrower's credit report before making private
student loans. Students with no credit history, or poor
credit, generally have to pay higher interest rates than
those with a good credit history or with parents who
will co-sign on the loan. Because of this, poorer
students end up with the most expensive private student
loans.
Private student loans completely counteract the
financial aid system which is intended to provide access
and affordability to students who are the least able to
pay.