Finding money for college can be difficult. Many of us resort to student loans, which explains why Americans owe nearly $1.5 trillion in student loan debt.
But not all loans are created equal. If you’re considering personal loans to fund your college education, you might want to think twice. Here’s why personal loans for undergrad students aren’t the best idea.
3 ways personal loans for undergrad students can hurt you
The cost of college is high. In-state students attending four-year public institutions pay nearly $10,000 a year on average. It’s more for private colleges and universities.
It’s no wonder undergraduates are turning to personal loans to pay for school. But personal loans can do more harm than good.
1. Quick repayment terms
While federal student loans have a standard 10-year repayment plan that doesn’t kick in until six months after you graduate, personal loans have some of the shortest loan terms — six months to seven years, depending on your lender. Then you must start paying back the loan right after you take it out.
For a college student who might not have a lot of time for work between classes and studying, that isn’t ideal. You might not be able to afford payments so soon after borrowing, which could result in missed payments and derogatory marks on your credit report.
2. No repayment help
A quick turnaround isn’t the only drawback to personal loans. If you can’t afford payments, federal student loans have options to help you out, such as deferment and forbearance, income-driven repayment plans, and consolidation.
Personal loans for undergrad students don’t provide the same benefits. But some lenders offer help. For example, Payoff has job loss support and works with you if you can’t afford to make payments.
3. High interest rates
Personal loans can be used for a variety of reasons. But because they’re usually unsecured loans, lenders need to make sure you’re responsible enough to pay them back. That’s why interest rates are higher, typically ranging from about 10.00% to 32.00%.
The interest rates vary depending on your credit score. The higher the credit score, the lower the interest rate. The higher the interest rate, the more money you’ll pay over the life of the loan. You’ll want to do your best to get the lowest possible interest rate.
But federal student loans offer some of the lowest interest rates. Direct Loans for undergrads have an interest rate of 5.05% for loans disbursed on or after July 1, 2018.
Federal rates don’t change depending on your creditworthiness either. Regardless of your credit score and history, the interest rate for federal student loans stays the same.
3 places to look for college money instead
If you’re thinking about getting a personal loan to pay for college, exhaust all your other options first. Here are a few places to look before getting a personal loan.
1. Grants and scholarships
To get as much free money as possible, complete the Free Application for Federal Student Aid (FAFSA). When you get your award letter, you’ll see how much federal aid you’ll get in the form of grants, scholarships, and loans.
Sometimes you’ll need to apply for state-specific grants separately from the FAFSA. Look for ones close to home by browsing for grants by state. This is helpful whether you’re staying in state for college or going out of state and want to see what other places offer.
2. Family and relatives
It really does take a village to raise a child. So you might need to call on your village to help you in a financial pinch.
Talk to your friends and family about gaps in financing your education to see if they can help you out. If it’s a family loan and not a gift, talk about ways to pay the money back either after college or during breaks from school.
Parents and other relatives might be more inclined to help instead of letting you take on a personal loan. Talk to them about your education and career plan. Explain how important their help will be. Sometimes all you need to do is ask.
3. Federal student loans
If you need to borrow money, taking out federal loans should be your first stop. Direct Subsidized Loans are available to students with financial need. They don’t accrue interest while you’re in school.
Direct Unsubsidized Loans are also available to anyone who wants them, but interest starts adding up when you take out the loan, not after you graduate.
Avoid personal loans if you can
Personal loans for undergrad students can be a great help to fill in any funding gaps for school. But they should be your last resort when you’re looking for money.
Exhaust all your free options first, including grants, scholarships, and relatives. Then apply for federal aid.
If you’re still short on cash, consider private student loans. They offer longer terms than personal loans, and since lenders know you’re in school, they’re willing to work with you on repayment terms that are best for you.
If you’re still having trouble paying for school, personal loans can help you in a pinch. But be sure to find ones that offer you the lowest interest rates and best repayment terms. School is important, but you shouldn’t have to worry about paying for a loan while getting your education.
Need a student loan?Here are our top student loan lenders of 2018!
1 = Citizens Disclaimer.
2 = CollegeAve Autopay Disclaimer: All rates shown include the auto-pay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.
* 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.
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|3.69% – 12.07%2||Undergraduate, Graduate, and Parents||Visit CollegeAve|
|4.07% – 12.19%1||Undergraduate, Graduate, and Parents||Visit Citizens|
|3.83% – 12.11%||Undergraduate and Graduate||Visit Ascent|
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