Students Resorting to High-Interest Private Loans

by Center for Personal Finance editors

Cheap is nonexistent when it comes to financing a college education. As the cost is steadily rising, to make up for federal aid shortfalls students are being forced to turn to private loans with high interest rates, according to the New York Times.

Over the past five years, the amount of private loans in the student finance market has tripled, reaching $17.3 billion in the 2005-06 school year. These loans can have interest rates as high as 20%--similar to interest rates on some credit cards. By law, federal student loans cannot have an interest rate more than 6.8%.

So why don't students simply take out more federal loans? The last time Congress raised the amount students could borrow on federal loans was 15 years ago.

According to USA Today, private loans now make up one-fifth of student debt—a decade ago it was a measly 4%.

The College Board offers students these money-saving tips:

• Don't borrow a dollar more than you need.

• If you'll need more money than your federal aid loan will cover, borrow the maximum amount you can from the government, then turn to a private lender, such as your credit union, to make up the shortfall.

• Shop around for the best interest rate.

• Budget your spending, work more, and save the money you make during summer.

• Keep your eyes peeled for scholarship opportunities—you never have to repay those.

And, contact the professionals at your credit union with any questions. They are ready to help with life's big adventures.

Published July 30, 2007

Printed Thursday, November 20, 2008

  Home & Family Finance® Resource Center
  Copyright © 2008 - Credit Union National Association, Inc.