Private student loans waste money

As a personal finance columnist, there are some things that make me pull my hair out. I try not to think about them, because I have less and less hair these days and people are noticing.

On the list are payday loan shops that gouge the down and out, credit card banks that slap 35 percent penalty interest rates on people who skip a single payment, and brokers who make fat commissions by locking clients into overpriced variable annuities.

The devil should keep a hot spot ready for the guy who invented the nasty software that banks use to handle bounced checks. When you overdraw your account, the program sees that you bounce several little checks instead of one big one. Each bounce can cost you a $30-plus bank fee.

This week, I lost another clump of hair. It seems that many college and trade school students are taking out pricey private student loans when they're eligible for cheaper federal student loans. That's like throwing money out the window.Federally backed student loans, called Stafford loans, charge 6.8 percent interest. Students who show financial need may qualify for a subsidized Stafford and pay no interest while in school, and only 5.6 percent later. The loans are guaranteed by Uncle Sam, so the lenders require no credit checks.

By contrast, anything goes in the private student loan market, where you can pay interest of 18 percent or higher. Private loans carry an added risk: Their rates are variable, going up and down with an index, often the prime rate. If rates rise, so will your interest payment.

Stafford loans also offer more mercy if you have trouble repaying. There are forbearance programs and the new "income-based repayment" program that make payments affordable. You won't get those with most private loans.

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Don’t Let Your Student Loans Get the Best of You

Student loans can really put a damper on your new life after college. This is especially true if you are like many students and owe at least $15,000 for loans. If you do not take steps to pay off your student loans sooner than later, you could be paying for the loans for ten to twenty years. In that time, you will be paying back a lot of interest even if you received fair interest rates at the time you took out your student loans.

Make smart choices about your student loans even before you graduate college. It is often a good idea to avoid private student loans which often include origination fees, higher interest rates and variable rates. You end up paying back too much money on even the smallest of loans. Many private lenders add the origination fee onto your total balance which means you have an even higher amount on which you must pay interest.

If you have the option of deferring your interest on a loan while in college, decline that offer. It might seem like a good idea to hold off on paying interest until after you graduate college, but it is not. The interest that you accumulate during those four years can be compounded and added to your total balance. You do not want to find that you are making interest payments on top of interest. If you work a few hours each week so that you can pay your interest on a quarterly basis, it will be worth your time.

Make payments on your principal balance a few times each year. You will not be making regular monthly payments on your loan while you are in college. This does not mean that you cannot make any payments at all. Save a few dollars from your job each week in order to pay a couple hundred dollars on your student loan once or twice during the school year. Make certain that you state that the payment should be applied to your principal balance, not to the interest on the loan.

It is possible that you might receive financial aid in excess of your tuition and related expenses. If this occurs, you might want to consider applying some of that money to the balance of your current student loans. Once again, you will be taking the opportunity to pay off your balance sooner. Do not forget to state that the money you are paying is to be applied to the principal rather than interest.

Consider making your student loan payments and interest payments during the grace period. You will usually have six months after graduation in which you do not need to worry about student loan payments. If you have a job lined up upon graduation, you might want to ignore this grace period. Start making payments on your outstanding student loan. The sooner you start to make payments, the sooner your loans can be paid off.

You can defer student loan payments a couple times throughout the duration of your repayment period. You can take these options if you are experiencing financial, health or other hardships. You should only apply for a forbearance or deferment if there is no possible way for your to maintain regular payments. Your interest will accumulate during these time periods and you will be extending the duration of your loan.

Put extra money on your student loans when you make your regular payments. Anytime that you are able to pay more than the amount due on your loans, make that extra payment. You should apply it to the principal in order to see your balance decrease faster. You can pay off your loan in a shorter amount of time and will end up paying less interest. If you are fortunate enough to earn an excellent income, pay extra on your loans each month.

Use money that you do not receive on a regular basis to pay on your student loans. For example, consider applying all or some of your tax return each year to your student loan. You might even use money that you receive as gifts to pay more of your principal balance for your student loans. Even the smallest amounts can make a big difference when you are working to unload the burden of student loan debt.

Good planning and being responsible will help you to take control of your student loans rather than letting them take control of you.


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