Tuesday, January 2, 2007

Private Student Loans: Pros and Cons

Many financial aid experts will urge prospective students, with conviction, that private student loans are the logical alternative to federal aid in affording higher education. Although naysayers of federal aid are correct in that private student loans bridge the gap between federal aid and the actual cost of higher education, these private alternatives can be more damaging to borrowers than beneficial if used as a substitution to federal aid rather than a supplement.

Indeed private student loans have their advantages. Applicants can be approved for sizeable loans - in some cases up to $30,000 - in minutes. There are no application deadlines, rather prospects who are enrolled halftime or more, or are planning to enroll halftime or more, at any accredited higher education institution may apply at any time. Furthermore, private aid is awarded not on need-based criteria like federal aid, rather on creditworthiness.

However, as any conscientious consumer would admit, "If it looks too good to be true, then it probably is." Although the advocates of private education loans persuade borrowers that interest rates are fixed, what they really mean is that interest rates are fixed at prime rates that fluctuate quarterly based on LIBOR (London Interbank Offered Rate), plus a margin at the discretion of the lending institution. Similarly, such advocates would have prospective borrowers believe that private college loans offer affordable repayment options comparable to federal student loans.

Although private student loan borrowers are granted certain flexibility regarding the timeline in which repayment begins, private loan repayment terms cap at 15 years, half of the time allocated to qualified federal student loan borrowers. A trivial discrepancy you say? Not so. By extending a repayment term - possible only through consolidation - borrowers' monthly payments decrease by over 50%.

Private student loan holders forego other vital benefits afforded federal loan holders. For instance, if a federal student loan holder becomes disabled or deceased, the loans are forgiven making repayment unnecessary. Private loan holders' heirs would have to repay the loans in full from the deceased's estate.

Even the disabled and unemployed are still liable for their debt. Nobody anticipates such catastrophic events; however, the federal government provides an alternative to the hardship of unaffordable loan repayment by complete loan forgiveness.

As reputable private loan sources purport, private student loans are only valuable when filling the gap between total college expenses and a borrower's awarded financial aid. To use private student loans as a substitution to federal aid, rather than a supplement is short-sighted on the part of the borrower. Researching affordable methods of securing college financial aid is a short-term investment of time for a long-term return.

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