Don't Let Private Student Loans Destroy Your Finances, Too

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My AOL friend, Kyle, recently shared his struggles with managing not only a career after college, but also a crippling level of student loan debt.

I wish I could say his student loan burden was unique; however, he is part of a growing epidemic of graduates with expensive degrees and dismal return prospects on those degrees.

Over this past summer there was much attention on the rise of student loan rates based on the new loan pricing model approved by the Bipartisan Student Loan Certainty Act 0f 2013. In addition, President Obama is working on the expansion of the loan forgiveness plans that are already in place for federal loans.

What continues to be missed by the mainstream media is that all the student loans discussed are only federal loans; they neglect to mention the increasing and more problematic growth of private student loans.

During the 2011-12 school year, close to 1.4 million students, like Kyle, took out private student loans to help fund their education.

I understand that of the $1 trillion student loan market, private student loans only consist of about 20 percent; however, it is the private student loans that have the potential to be the most dangerous for students.

For undergraduate students, federal loans have borrowing limitations to prevent both the government from overextending credit and the students from taking out too much credit. In addition, federal student loans have a wide array of repayment plans, many of which are based on your income and a number of them offer forgiveness options after a period of time.

Private student loans are completely different. Typically they are underwritten with a co-signer and the lender bases the loan amounts on the co-signer's financials.

This system is flawed from the onset. In most co-signer / student relationships, there is an expectation that the student, like Kyle, will be responsible for the loans when they graduate. Since this is the case, the underwriting should be based on the student's financials and not the co-signer's.

If Kyle's initial career trajectory as a Commercial Guitar Major were taken into account at the beginning of the student loan process, then I imagine the lender would not have offered $132,453 in loans to fund this major.

Not only is the underwriting process for private student loans flawed, but also the repayment options are significantly less accommodating than federal loans. Most private student loan providers only offer one or two repayment terms with no consideration for income.

If Kyle had federal loans instead of private loans, his monthly repayment terms would be closer to $500 versus the $1,400 he is currently responsible for paying.

What are the solutions for private student loan borrowers?

The first step is making sure you don't take them out in the first place. According to the Institute for College Access and Success, 47 percent of private student loan borrowers borrowed less than they could have from the federal Stafford loan program. Before even considering private loans, students and parents should exercise all federal loan plans to the fullest.

Each year when students sign up for additional loans, they should review their loan package thoroughly and make sure they are avoiding private loans where possible.

If you have already graduated and now shoulder a private loan burden, one option to consider is additional education. I know it sounds counterintuitive, but even if you sign up for an additional six credits of classes a semester in an area you want to develop, your student loan provider will deem that you are still a student and you can defer your payments.

It is not ideal; however, you could take two classes at a community college for the year for $1,100, work where you can, and save as much as you can in that time to pay toward your loans.

If you are really struggling with payments, there are some private loan consolidation companies available that may provide you with the option of lengthening your repayment terms.

You need to be careful with this option, though, as it consolidates all your loans to one rate and if you have lower interest loans, those will be bumped to the higher rates. In addition, by lengthening your repayment terms, you will pay more interest over time.
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