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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