According to CNBC, 92% of student loan borrowers have federal loans. However, private student loans still make up 7.71% of the student loan debt in the U.S. (1) Our president is looking at ways to forgive federal student loans. But if you are one of the almost 8% with private loans, you may wonder if there is hope for widespread private student loan forgiveness.
Are Private Student Loans a Good Idea?
Private student loans are from lenders that are not part of the federal program for students. If you did not qualify for federal money, you likely saw an ad for other programs that looked comparable or even better than the federal possibilities.
However, you may not have looked at the fine print. Companies often offer loans that seem competitive, but in reality, have fees that roll into the loan and accrue interest. Some loans even cause a borrower to gain debt even though they make their monthly payments in full!
When you first start paying a loan, you mostly pay for the right to use the bank’s money. This part of your payment is called the “interest” portion. Most of your payments for the first few years pay the bank their interest money. The actual loan amount you wanted to take out is called the “principal”. When you only pay interest, more interest accrues on the principal amount. This compounded interest adds debt and time to your loan. The process of paying more interest in the beginning is called amortization or compounded interest. Looking out for “interest only” or high interest loans saves you time and money in the long run.
You can also struggle with student loan debt if you borrow more than you can afford. If you take out a loan for $250,000 from a private lender and then get a job making only $50,000 per year, you could have a problem paying your monthly payments. Experts say that you should only plan to spend 8-10% of your monthly income on your student loan each month.
What Can I Do?
Pay More Each Month
Because of the principles of amortization, if you pay a bit extra each month toward the principal part of the loan, you will shave years and thousands of dollars off your loan. Before you make additional payments on your principal, talk with your student loan servicer to make sure they apply payments correctly. If the servicer applies payments toward the interest portion of your loan instead of the principal, you won’t pay off your loan as fast.
Financial tables that show monthly amortization can help you see the actual numbers for your loan. Banks want to make money from you first before they let you pay down the loan amount that you actually borrowed. Although you pay the same amount every month on your student loan, the part of the payment that goes to interest changes with each payment you make.
To learn more about this, look at examples of how paying more can help over time. According to USNews, “Be careful! If your monthly payments are lower than the amount of interest that accrues, the unpaid interest may capitalize and become part of the principal. This is called negative amortization.”
It is hard to believe, but negative amortization can make your loan increase over time rather than decrease! You can prevent negative amortization by always paying your interest portion in full each month. Beware because lenders and student loan servicers are not on your side. They are not interested in helping you pay off your student loans faster. They desire to profit from your hard-earned money and your lack of financial knowledge.
The lenders who offer negative amortization are taking advantage of unsuspecting young people. Unethical lenders make these predatory loans to students unaware of the financial black hole they are falling into.
Another way out of a predatory student loan is to refinance. With interest rates low in 2021, it is good to refinance a loan with high rates. The rates may not stay low for long, so now is the best time to look at the options out there.
For the best possibilities, talk with financial advisors unaffiliated with lending institutions. Look for community programs that help with budgeting or financial counseling. Talking with a retired professional adult in your community could also be a good fit for help with making sound financial decisions.
Get Professional Help
If you were made promises by a lender who fast-talked you into a student loan with predatory terms, you need a consumer rights attorney to fight for your rights as a student loan borrower. At Law Zebra, we have a network of attorneys across the country that understand how these unethical companies operate to swindle young adults who are just looking for a good education. If you have a case against an unscrupulous lender, we don’t get paid unless you win. Don’t let unethical lenders prey on you. Fight back with knowledge and with the help of an attorney.