With the fall semester upon us, many of you may be considering how to finance your college expenses. Considering this, we wanted to share some critical insights from a recent CNBC article regarding private student loans and their associated risks.

The private student loan market has experienced significant growth, surpassing $130 billion over the last decade. While these loans can fill a financial gap, it’s crucial to exercise caution and consider the following points:

• Max Out Federal Aid First: Before considering private loans, exhaust your federal student loan options. Federal loans offer benefits and protections that private lenders often do not provide. Borrowing privately should be considered only when you’ve reached the federal loan limits and still require additional financing.
• Borrow Responsibly: Remember that excessive private borrowing may indicate overborrowing. A good rule of thumb is not to borrow more than you expect to earn in your starting salary after graduation.
• Scrutinize Repayment Terms and Protections: Federal loans offer forgiveness programs and forbearances, which private lenders typically do not provide. Private loans may have severe terms, including wage garnishment and asset seizure for both the borrower and cosigner if you struggle with payments. Be cautious, especially when a cosigner is involved.
• Pay Attention to Interest Rates: Private student loans can have fixed or variable interest rates. It’s generally advisable to opt for a fixed rate, particularly in a rising-rate environment, as variable rates may increase over time. Be aware that private loan interest rates can be high, sometimes reaching as much as 18%, whereas federal student loans for undergraduates currently have a 5.5% interest rate.

As your trusted CPA, we recommend careful consideration of these factors before pursuing private student loans. Your financial well-being is our priority, and we’re here to provide guidance and support in making informed decisions regarding your education financing.

If you have any questions or need assistance in assessing your financial options, please don’t hesitate to reach out. We are here to help you navigate this important aspect of your financial journey.