The high costs of college education are forcing more students to borrow more money. And that means more young people will have to educate themselves on interest rates and other costs attached to those loans.
Tuition costs at many statesupported colleges and universities now exceed $5,000 a semester. Many private institutions charge more than $25,000.
Increasingly, private lenders are granting loans to students who either don’t realize federal fi nancing is available or no longer qualify for assistance.
The cost difference can be jolting – sometimes triple the cost of federal loans.
Federal Stafford loans have a fixed interest rate of 6.8 percent, while interest rates on private loans may exceed 20 percent.
A six-year, 6.8 percent note on a college debt of $10,000 would cost a student about $2,400 in interest. The same debt, financed by a private lender at 20 percent, would cost that same student about $7,000 in interest.
As with some mortgage loans, some private lenders charge variable interest rates on loans to college students. That makes interest rates even harder to calculate in advance, a situation that could be disastrous for students in the event of a prolonged period of tight money. Interest rates in the 1980s, for example, ranged as high as 17 percent.
Today, many students are borrowing much more than $10,000 for college.
“Nationally, college students get half of their fi nancial aid dollars through loans. In Texas, it’s closer to two-thirds. The rest of the money comes from grants,” Holly Hacker, a staff writer for The Dallas Morning News, said in a recent column. “Some lawmakers and consumer Soaring college tuitions blamed; House passes bill to make education more affordable advocates are pushing for tighter regulation of private loans. They want banks to disclose more details about the terms of the loans, to limit interest rates and to stop marketing practices that some consider deceptive.”
Private loans are the fastestgrowing sector of the multibillion- dollar student loan industry. In 2005-06, college students borrowed a record $17.3 billion in private loans, according to a report issued by the College Board and quoted in a recent article that appeared in USA Today.
Last academic year, families took out more than $78 billion in private and federal loans across the nation.
North Lake College student Carolina Carvajal received thousands of dollars in federal student loans when she began her college education at the University of Texas at Arlington.
But the federal loans were not enough for tuition and college expenses, so Carvajal sought a private loan through her bank to cover all the costs.
“I saw ads and commercials on TV and knew I definitely shouldn’t go that route,” she says.
Carvajal was aware that the variable interest rates of her private loan would be higher.
But as that interest rate reached 11 percent, she realized her private debt needed to be paid off quicker than her federal, fixed-interest loans.
Carvajal’s parents were willing to help out with the tuition expenses, and they quickly paid off her private loan.
“I am very fortunate to have parents that have the resources to pay off my college debt,” Carvajal says. “I hope to graduate in 2010 and will possibly have to get another private loan. But, once again, I wouldn’t delay paying it off, due to the outrageous interest rates.”
All students are not as fortunate as Carvajal, and some could require more than a decade to pay off their privately-fi nanced educations.
Congress may soon help some of those students.
On Feb. 7, the House passed a bill aimed at holding down college costs, slowing tuition increases at larger schools, barring private lenders from using predatory practices targeted at students.
U.S. Rep. George Miller, a California Democrat who chairs the education committee, states: “The bill will create a higher education system that is more affordable and easier to navigate for consumers.”