Private Student Loans: Proceed With Caution
Although the government has taken steps to bolster the federal student loan program by expanding Pell Grant awards and raising the maximum award amount of federal Stafford student loans, federal financial aid will still not be enough for many families to pay for college this year.
Grappling with stock market losses that have negatively affected 529 college savings plans and with declining home values that have
essentially made home equity loans nonexistent, families of college students will likely have to rely more on private student loans, in
addition to federal aid, this year to help pay for their education expenses, reports The New York Times (“Students’ First Lesson: Beware
Loans’ Fine Print", May 2, 2009).
But the Times warns that private student loan borrowers need to be particularly cautious when applying for loans.
Private student loan lenders can set their own loan terms and aren’t required to inform their borrowers of the loans rates, fees, and terms.
Citing data compiled by Student Lending Analytics, a company that helps schools analyze lending programs, the Times advises families
applying for private student loans to weigh their options carefully and to take a close look at the fine print.
Interest Rates Vary From Lender to Lender
Unlike federal student loans, which have fixed interest rates, private student loans carry an average interest rate of 11 percent, according
to Student Lending Analytics. However, lenders charge interest rates higher than 11 percent and, in some cases, won’t disclose the interest
rate a borrower will be charged until after a borrower signs a promissory note.
Banks offer fixed-rate loans ranging from 7 percent to 12 percent, with big banks charging the highest rates. But at times, banks —
particularly JPMorgan Chase, PNC Financial, and SunTrust Bank — hike up the rates on these loans by two to three percentage points if a
borrower misses just one loan payment.
The variable-rate loans that private lenders offer can be tied to a specified interest rate index, like the prime rate, and their rates can
vary depending on the changes to rate index. Chase, for example, charges interest as high as 13.5 percent on these loans.
Lenders Should Disclose All Fees
Tim Ranzetta, the founder of Student Lending Analytics, says lenders should be required to disclose any adjustments they make to an interest
rate when a borrower misses a payment or when any other negative activity takes place on a borrower’s account.
Currently, lenders don’t disclose all the possible fees borrowers may be charged in the servicing and collection of their student loans, and
lenders’ loan contracts don’t always inform borrowers of the borrower benefits promised in the lender advertisements, including the
possibility of a borrower being charged a lower interest rate after graduation.
Ranzetta says, in addition to demanding that lenders fully disclose their loan terms, lenders should also be required to list their
advertised benefits in the promissory note in order to contractually obligate lenders to offer their benefits.