Avoid the Pitfalls of Private Student Loans

When I started college nearly 40 years ago, the costs of room, board, tuition and books at Rutgers were less than $3,000. I took out a loan for a little more than half the money, got help from my parents as well as small scholarships, and took  a part-time job to pay for the rest, including gas and car insurance. Four years later, I had borrowed less than I would earn after working six months in even a menial job. I had a liberal arts degree.

Today, college costs as much as $30,000 for a year at Rutgers, and nearly $60,000 for a year at a private school. The loans that I took out with subsidized interest are need-based today. A son or daughter would not qualify to borrow the maximum, which is $3,500 for a freshman. But s/he would be able to borrow $2,000 with unsubsidized interest. I’d be thankful for small favors. The maximum amount that any dependent undergraduate student may borrow in Federal Stafford Loans, subsidized and unsubsidized, is $31,000.  Only $23,000 of the principal may be interest subsidized.

So here’s a tip: When it comes to taking out anything but a Stafford Loan, don’t do it. Stay away from Private loans. Take the literature you receive from the banks and toss it in the trash.

Private lenders set their own interest rates and different terms for repayment. It is not worth leaving college with a debt that is no less than equal to rent. A school might provide a “fun” setting for four years, but you do not want to spend the next 40 years trying to pay it back.

So what can you and your student(s) do?

+ Try for merit-based scholarships from state schools.

Most state-supported schools have merit-based scholarships for in-state students who have met or exceeded minimal GPA and ACT or SAT scores.  These may cover full tuition, sometimes a little more. Some schools such as Miami of Ohio, Michigan State, Nebraska and Ohio State also have merit scholarships for out-of-state students. Others such as the flagships in Kansas, Minnesota, Nebraska, North Dakota and Wisconsin have agreements to offer in-state or reduced rates to students from neighboring states. West Virginia University has scholarships that are so generous, it is cheaper for New Jersey or Pennsylvania residents to go there than to their home state universities!

+ Aim for merit-based scholarships from private schools.

Private schools will give merit-based aid to students who rank in the top quarter of their applicant pool, or to students with special talents.  Depending on the school’s endowment and financial aid policies, your student might be able to earn a merit-based scholarship that significantly reduces tuition.  The key is to know where your student ranks in the pool. U.S. News is a helpful guide here, because it lists the SAT and ACT ranges for each school that participates in their rankings. Each school also has a Common Data Set that will tell you the SAT range or the ACT range for the most recent freshman class. The Common Data Set will also tell you the average loan and the average need-based and merit-based scholarship awards given to each student.

+ Check out schools that charge low tuition to everyone.

Some state schools charge everyone a low base rate, regardless of need, including all of the schools in the City University of New York system, the State University of New York system, Georgia’s state university system and Florida’s system, too.  Specialty private schools such as Cooper Union or the Webb Institute charge no tuition. So do work colleges such as Alice Lloyd College (KY), Berea College (KY) and Warren Wilson College (GA).

+ Consider military service.

Your student does not need to be admitted to a service academy. Reserve officer programs cover tuition, fees and books and carry a small stipend. Students can also opt for the officer candidate programs where they receive training during the summer instead of the school year. But military benefits, except for summer officer candidate programs that are not attached to reserved officer program, also carry a military service obligation.

It is possible for anyone, except the most poorly qualified student, to float a financial boat that will allow him/her to graduate on time with as little debt as possible. Sometimes it might mean forgoing a dream school for one that might be quite similar, though not as well known. But it takes a family to be responsible for knowing their options. The debt that may be incurred by going to a dream school can turn out to be a long-running nightmare.

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