When it comes to the college application process, parents and students look to high school counselors to give them the information that they need in order to be successful. That’s especially true when it comes to the financial aid process as it’s a part of the application process that’s especially confusing.
Many parents and students don’t understand how student loans work, but most students will end up having to take on student debt. In fact, over 6 out of 10 students graduate from college with a student loan and the average amount of student debt borrowers have is around $28,000. It’s therefore critical that high school counselors are well-informed about both federal and private student loans so they can ensure that students make informed borrowing decisions.
Students Don’t Understand Private Student Loans
Unfortunately, it doesn’t seem like the message is currently getting through to borrowers. In 2016, we conducted a survey at LendEDU on undergraduate and graduate students’ understanding of federal and private student loans. What we found was concerning.
Most students did not understand how private student loans worked. For example, almost 76% of students didn’t know the difference between private student loans and federal student loans. Around 71% didn’t even know the risks of acting as a co-signer on private student loans.
What’s more concerning is that almost 8% of students didn’t know the interest rates on their loans and over 6% of students didn’t understand their repayment terms. In fact, 75% of students didn’t understand how interest rates work at all and over 55% of students were either not sure or believed that they would never be able to pay off their student loans.
What are Private Student Loans?
More students take out federal student loans than private student loans in order to finance their education and so while many counselors are well versed on the basics of that type of student debt not all understand private loans.
Private student loans are given out by banks, credit unions, and other lenders. They are similar to federal student loans in certain ways. For example, most also have a grace period of six months after you graduate before your have to start repayment and many offer things like the ability to defer your loan in certain situations although there are often fewer qualifying circumstances with private loans. You can also deduct the interest you pay on them on your taxes, just like with federal loans.
But private student loans are different in some very important ways. For example, they are mostly given out based on credit-worthiness and ability to repay. Since most high school students don’t have a credit history or credit score and don’t have a high enough income to qualify about 90% of private student loans require parents, family friends, or grandparents to co-sign for the loan. While there are some lenders who are starting to use alternative underwriting criteria like good grades, or work experience to lend to college students without a co-signer – they are often smaller online lenders and don’t make up the majority of the market.
Private student loans are also different from federal student loan in that they have widely different interest rates. Each lender has different interest rate ranges and you can generally choose between variable and fixed rate loans. How much you pay is set based on the borrower’s or co-signer’s credit score and income.
Private student loans also have very different repayment options. When you take out a loan, you can choose the term length. Different companies offer different term length options which can vary widely from 5 to 15 years. Private student loans don’t have options like the income-based repayment programs that are offered by federal student loans.
Private student loans also don’t have the same types of borrower protections in the event of disability or death as federal loans have. Not all private student loans would be discharged or forgiven in such cases. Also, private student loans have different rules around things like deferment and forbearance and these vary from lender to lender so it’s critical that borrowers read the fine print on their loans.
The Consequences of Borrowing Too Much
One critical thing that high school counselors should be prepared to explain to borrowers and their families is the consequences of borrowing too much. Given that many students don’t believe that they will be able repay their student debt, it appears that many students are taking on more debt than they should based on their income potential and major.
That’s why it’s critical that high school counselors talk about affordability and student loans before students start taking on debt.
Nate Matherson is the co-founder and CEO of LendEDU. In 2014, Matherson started LendEDU in his University of Delaware dorm to help students and families learn about the consequences of student debt; Nate, 23, is still working to repay over $55,000 in student loan debt.