I remember when I was in college. Every fall I’d stand at the financial aid counter hoping upon hope that there would be enough funds to cover my next year of schooling. There were a few close calls and, to be honest, I don’t know what I would have done if my loans didn’t cover tuition. At the time I had a friend who covered the deficit with credit cards and it seemed like just about the craziest thing I could ever imagine. Who would pay 20%+ interest on tuition?
That was a few years ago, but students today are still facing this problem. While they now have more options than ever, the wide range of choices brings with it both positives and negatives. More often than not, students who aren’t covered by federal loans turn to private student loans which on paper seems like the logical thing to do. They’re loans that are structured just like federal loans, except they’re unlimited! But are private student loans really a good way to go? We explore that question and look at alternative ways to pay for college below.
The High Cost of Private Student Loans
There are many similarities between federal and private student loans. They both function as way to pay for tuition, books, fees, and room and board. They both exist solely for the purpose of paying for education. They both offer long repayment terms so graduates don’t feel under the gun to pay them off while they’re still establishing their careers.
That’s where the similarities end. Federal student loans are backed by the government and, while they can be undoubtedly expensive, they offer a great deal of repayment, deferment, and forgiveness options. They also offer a six month grace period after graduation (buying you half a year to obtain your first job before you have to start repaying) and the unsubsidized loans cover the interest for you during your schooling. None of these options apply to private loans.
Then there’s the higher cost of private student loans. According to a recent report by The Consumer Financial Protection Bureau cited by Money Talks News, private student loans are “generally more expensive and risky”. Plus, many students taking on private loans didn’t even try for federal loans first. That’s a mistake that can cost students a great deal of money on interest as well as opportunities for assistance.
But why are private loans so expensive? First, the interest rates aren’t capped by the government the way federal loans are. Second, they currently stand at an average that nearly doubles the current federal rate, clocking in at 8-12% and up. When you consider that the average college graduate carries anywhere from $27,000–$30,000 in student debt with repayment periods of 5-20 years, that interest cost can seriously add up.
So what are you to do if you’re a student who has maxed out your federal funding for the year? Consider a new way to pay for college.
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A New Way to Pay for College
Private student loans and credit cards are no longer your only option for paying for your education after federal loans have run out. There’s an increasing trend that allows you to borrow more unconventionally and at a lower cost: crowdfunding.
Crowdfunding – the practice of funding something by raising money from a large number of people – is easier than ever thanks to social media. And websites looking to help students obtain money for school have caught on to this trend in a big way. For example, ScholarMatch provides a platform for students who wouldn’t otherwise have the money for school apply for “scholarships” funded through donors to the website. It’s great for donors too as you can browse the students and directly fund someone whose story and goals you connect with.
Then there’s CommonBond, a place for MBA students to borrow or refinance existing loans from investors who attended their schools. SoFi also connects alumni with borrowers, although their focus is solely on helping students and graduates consolidate existing education loans. New websites like this are popping up all the time, so if you do a little digging you might just find the right one for you. (Although, before you do any borrowing you should read reviews and consider carefully the pros and cons of the particular lender you’re hoping to utilize.)
Crowdfunding doesn’t just end with the current student. If you’re a parent still paying your own student loans, you can at least get a leg up on your children’s education through crowdfunding as guided gift giving. Websites like GradSave, Instagrad, and GiveCollege give parents a platform to collect savings for their child’s college education. So at your child’s next birthday party you can ask people to contribute to his or her future education, truly bringing back the old saying, “it takes a village to raise a child”. Once your children head off to school, they will do so knowing that an entire community of loved ones helped them get there.
The bottom line is that there is no one way to pay for school if federal loans don’t cut it. Whether it’s exploring niche scholarships, crowdfunding, or private student loans, study the terms of repayment before you make a decision so you can be sure that your decision doesn’t just work for you now, but that it won’t wreck your finances in the future.
Image Credit: uniinnsbruk