In the summer of 2009, I spent six weeks in Fiji. While I spent most of my time there doing humanitarian work in various villages, I also had a lot of fun. I skydived, went whitewater rafting, stayed at a luxury resort, and took a five-day trip to New Zealand.
But when I returned home a month before the fall semester started, I realized I’d spent more on my trip than I’d expected. As I started working again, I had enough money to pay for rent, groceries, and other living expenses, but I didn’t have enough for tuition.
While you might not have experienced this scenario, there could be times when an unexpected expense comes up or you don’t plan your finances well enough. Federal loans for students are an option, but the Department of Education doesn’t disburse them on demand.
As a result, you might look for other ways to cover your short-term cash needs. If you do, it’s important to know which loans for students to avoid and to familiarize yourself with better alternatives.
3 loans for students you should avoid
If you’re new to credit, you don’t have many borrowing options. But loans targeted to people with bad or no credit usually cost more. Here are a few examples.
1. Payday loans
Payday loans are ridiculously easy to get. They don’t require a credit check, and you can typically get cash within minutes.
The problem? You usually have only a couple of weeks to repay the loan, and the typical APR is almost 400.00%, according to the Consumer Financial Protection Bureau. If you can’t pay it back and have to take out a new payday loan to pay off the first, you could end up stuck in a vicious cycle of predatory debt.
What you should try instead: A payday alternative loan (PAL). Some credit unions offer PALs to their members to help lower the cost of a short-term loan. Your loan term can range from one to six months, and the maximum APR is 28.00%.
The main drawback is you have to be a member of the credit union for a certain amount of time before you can apply. So, you can’t join a credit union today and get approved for a PAL immediately. Also, not all credit unions offer PALs, so if you’re a member of a credit union, check its loan offerings.
2. Auto title loans
If you have a car, you might think an auto title loan is worth considering. After all, the loan is secured by your car’s title, so you should be able to expect lower interest rates, right?
The reality is these short-term loans also have three-digit APRs, and you typically have between 15 and 30 days to repay the loan. You could even say they’re worse than payday loans because you can lose your car if you don’t pay back the loan on time.
What you should try instead: A short-term campus loan. Some colleges offer short-term loans for students to help cover tuition. This was the route I took to pay my fall semester tuition.
I paid a $20 processing fee to borrow $2,000 and didn’t have to pay interest as long as I paid off the loan within 60 days. Since I did, my APR, which included just the processing fee, was 6.08%:
$20 / $2,000 = 1%
1% x 365 days = 3.65
3.65 / 60 = 6.08% APR
3. Cash advances
If you have a credit card, it might be tempting to head to the ATM and withdraw some cash. This type of loan isn’t as costly as a payday loan or an auto title loan, but it’s not ideal for two reasons:
- Credit cards charge a fee, typically 5% of the advance amount. So, if you withdraw $500, you’ll have to pay $25 upfront.
- There’s no grace period with cash advances, so interest starts accruing immediately. With normal credit card purchases, interest doesn’t hit until after your due date. Also, the APR for cash advances is usually higher than the APR for regular purchases.
As a result, a cash advance is rarely a good idea.
What you should try instead: A 0% APR promotion. Some credit cards offer a 0% APR promotion on new purchases for a period. As a student, you likely won’t get approved for many of these cards. But both Discover student credit cards offer a 0% APR promotion for six months, giving you time to pay off your purchases interest-free.
Just be sure to pay them off in time. As of February 2018, your APR could be as high as 23.24% after the promotion ends.
2 loans for students to help you prepare in advance
The loan alternatives we’ve listed so far are good choices for short-term needs, but you can avoid these situations in the first place with better planning.
Both federal student loans and private student loans can help you pay for your college expenses, including room and board, supplies, and other necessary costs.
Since federal loans for students don’t require a credit check and often have lower interest rates, they’re usually preferable. For loans disbursed before July 1, 2018, federal loan interest rates range from 4.45% to 7.00%.
But if your federal loans aren’t enough, there are several private student loan companies that offer loans for students with decent terms. If you go the private student loan route, be sure to compare several lenders before applying. Also note that you’ll likely need a cosigner to get approved.
If you use these loans for students wisely, you should be able to avoid short-term cash shortfalls. But be sure to research all your options so you get the best deal.
Need a student loan?Here are our top student loan lenders of 2019!
|1 Important Disclosures for Ascent.
Before taking out private student loans, you should explore and compare all financial aid alternatives, including grants, scholarships, and federal student loans and consider your future monthly payments and income. Applying with a cosigner may improve your chance of getting approved and could help you qualify for a lower interest rate. Ascent Student Loans may be funded by Richland State Bank (RSB). Ascent Student Loan products are subject to credit qualification, completion of a loan application, verification of application information and certification of loan amount by a participating school. Loan products may not be available in certain jurisdictions, and certain restrictions, limitations; and terms and conditions may apply. Ascent is a federally registered trademark of Turnstile Capital Management (TCM) and may be used by RSB under limited license. Richland State Bank is a federally registered service mark of Richland State Bank.
* Application times vary depending on the applicants ability to supply the necessary information for submission.
2 Important Disclosures for CollegeAve.
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
Information advertised valid as of 2/1/2019. Variable interest rates may increase after consummation.
3 Important Disclosures for Discover.
* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers.
4 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
5 Important Disclosures for SunTrust.
Before applying for a private student loan, SunTrust recommends comparing all financial aid alternatives including grants, scholarships, and both federal and private student loans. To view and compare the available features of SunTrust private student loans, visit https://www.suntrust.com/loans/student-loans/private.
Certain restrictions and limitations may apply. SunTrust Bank reserves the right to change or discontinue this loan program without notice. Availability of all loan programs is subject to approval under the SunTrust credit policy and other criteria and may not be available in certain jurisdictions.
SunTrust Bank, Member FDIC. ©2019 SunTrust Banks, Inc. SUNTRUST, the SunTrust logo and Custom Choice Loan are trademarks of SunTrust Banks, Inc. All rights reserved.
6 Important Disclosures for LendKey.
Additional terms and conditions apply. For more details see LendKey
7 Important Disclosures for CommonBond.
A government loan is made according to rules set by the U.S. Department of Education. Government loans have fixed interest rates, meaning that the interest rate on a government loan will never go up or down.
Government loans also permit borrowers in financial trouble to use certain options, such as income-based repayment, which may help some borrowers. Depending on the type of loan that you have, the government may discharge your loan if you die or become permanently disabled.
Depending on what type of government loan that you have, you may be eligible for loan forgiveness in exchange for performing certain types of public service. If you are an active-duty service member and you obtained your government loan before you were called to active duty, you are entitled to interest rate and repayment benefits for your loan.
A private student loan is not a government loan and is not regulated by the Department of Education. A private student loan is instead regulated like other consumer loans under both state and federal law and by the terms of the promissory note with your lender.
If your private student loan has a fixed interest rate, then that rate will never go up or down. If your private student loan has a variable interest rate, then that rate will vary depending on an index rate disclosed in your application. If the interest rate on the new private student loan is less than the interest rate on your government loans, your payments will be less if you refinance.
If you don’t pay a private student loan as agreed, the lender can refer your loan to a collection agency or sue you for the unpaid amount.
Remember also that like government loans, most private loans cannot be discharged if you file bankruptcy unless you can demonstrate that repayment of the loan would cause you an undue hardship. In most bankruptcy courts, proving undue hardship is very difficult for most borrowers.
8 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|4.23% – 13.23%1||Undergraduate and Graduate|
|4.20% – 11.44%2||Undergraduate, Graduate, and Parents|
|4.84% – 13.49%3||Undergraduate and Graduate|
|4.50% – 10.11%*,4||Undergraduate and Graduate|
|4.25% – 13.25%5||Undergraduate and Graduate|
|5.85% – 6.99%6||Undergraduate and Graduate|
|3.95% – 9.81%7||Undergraduate, Graduate, and Parents|
|4.45% – 12.42%8||Undergraduate, Graduate, and Parents|