If you are a student, you probably receive mail from private student lenders offering to cover “up to 100%” of your education costs.

Sounds good, right? But students and their families should exercise caution with such offers, financial aid experts say. Private loans — those from banks and lenders other than the federal government — offer fewer protections to borrowers than federal loans and tend to be more expensive. And unlike federal student loans, they can have interest rates that vary over the life of the loan. That could mean higher monthly payments, as rates likely go up.

Federal loan rates, which are affected by rising government bond yields, are expected to rise more than a percentage point for the next academic year, but they will be a better deal than private loans for most borrowers. Indeed, less than 10% of private borrowers — those with excellent credit — typically qualify for the lowest advertised rates on private loans, said financial aid expert Mark Kantrowitz. Most borrowers get higher interest rates, sometimes in the double digits.

Additionally, federal student loans offer repayment plans tied to the borrower’s income and options to suspend payments if the borrower’s finances are in trouble. Borrowers may be able to get their debt forgiven if they work in government jobs, especially if the changes to the program work as intended.

Private lenders may offer flexible payment plans or forbearance options, but they are not required to do so, student advocates say.

“Buyer beware,” said Michele Streeter, associate director of policy and advocacy at the Institute for College Access and Success.

The current general pause in payments on federal student loans, which has been extended until August 31, does not apply to private loans. And any future federal student loan forgiveness is also unlikely to apply to private loans.

“Federal student loans are almost always preferable to private student loans,” said Abby Shafroth, an attorney at the National Consumer Law Center who focuses on student loans.

It is generally best for students to cover as much of the cost of their education as possible through grants and scholarships, which do not need to be repaid, as well as savings and income before borrowing. But many students still cannot pay for their education without a loan.

Students who need loans must first opt ​​for federal loans, although these loans have limits on the amount that can be borrowed. In the first year, the limit for dependent students is $5,500 and the limit increases to $7,500 in the third and fourth years. The total cap is $31,000 – in case it takes more than four years to graduate. (The limits are higher for independent and graduate students.)

But due to the high cost of a college education, students may turn to private loans because they need more than they can get from the federal government. The average published price of a year at a four-year public college (including tuition, tuition, and in-state room and board) was nearly $23,000 for the academic year 2021-22, according to the College Board. The average was nearly $52,000 at private, nonprofit four-year colleges.

To bridge the gap, families can turn to alternatives like Parent Plus loans — federal loans with higher interest rates than direct student loans that are available to parents after a cursory credit check — or private loans. Some data suggests that many students who take out private loans haven’t maxed out their federal loans, suggesting they may not be aware of the differences between loan types, Streeter said.

“We encourage students to borrow up to maximum federal eligibility before turning to private loans,” she said. Private lenders can ask a borrower’s college to certify that a student has reached the federal loan maximum, she said, but that’s not a requirement.

Kantrowitz said the need to borrow loans from parents or private students can be a red flag alerting families to rethink their approach to their child’s education. It “may be a sign that the family is borrowing too much to pay for their education,” he said.

Students choosing private loans should shop around to compare rates and terms, Kantrowitz said.

Unlike federal student loans, private student lenders require a credit check, and only applicants with top scores get the best rates.

Since many students do not have an established credit history, private loans often require an applicant to have a co-signer, usually a parent, who is responsible for payments should the borrower default. Being released as a co-signer can be tough, Kantrowitz said, so parents can be hooked for a long time.

Factors such as customer service also need to be considered, Kantrowitz said. Is there a helpline if you need to reach someone on weekends? Can you update your address or contact information online?

Private lenders include Sallie Mae, which provided loans to more than 397,000 families in 2021 (“more than any other private lender,” according to its regulatory filings), and Citizens Bank, as well as online lenders like College Ave and SoFi.

At least a dozen states also offer student loans under special programs, usually to in-state residents attending an in-state college. Borrowers shouldn’t assume that rates and terms from state agencies are better than those from private, for-profit lenders, Streeter said. Be sure to check the details.

Here are some questions and answers about student loans:

What is a reasonable amount to borrow for college?

Kantrowitz recommends that your total student debt be less than your projected first-year salary. If your debt is less than your annual income, you should be able to pay off your student loans in 10 years or less, he said. If you plan to earn $55,000 — the average starting salary for a four-year college graduate in 2021 — your total loans should be less than that amount.

A similar rule applies to parents, he said. They must not borrow more, for all their children combined, than their annual income.

What are the current interest rates on student loans?

Interest rates on federal student loans are set annually and apply to all new loans made in a given academic year. The rate is fixed for the term of the loan.

Undergraduate direct loan rates are currently 3.73%. But they are expected to increase to 4.99% for loans made from July 1 through June 2023. (Federal loan rates are set each spring and are tied to the 10-year Treasury note, using a formula The Department of Education hasn’t officially announced the new rates, but Kantrowitz and others are projecting them based on the 10-year Treasury bond auction that took place Wednesday.)

While that sounds like a big jump, the effect on a borrower’s monthly payment is only about $3 more for a student borrowing the maximum of $5,500 in the first year and paying off the debt over a standard term of 10 years, according to Bankrate.com’s loan estimator. .

Private loan rates vary by lender. Many advertise fixed rates ranging from 3.2% to over 14%, and variable rate loans starting around 1%. But fixed- and variable-rate private lending rates are expected to rise as the Federal Reserve continues to raise its benchmark interest rate, said Greg McBride, chief financial analyst at Bankrate. “Private student loans are also on the rise.”

But think twice about taking out an adjustable-rate loan now, Kantrowitz said. For these loans, the lowest interest rates “have no choice but to rise”.

Are there limits to the amount of private loan I can borrow?

Some lenders set a minimum loan amount — say $1,000 — and cap loans at the annual cost of attending college.

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