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The Terror of Private Student Loans in the US
Felix von Wendorff
Updated Apr 10, 2017Save
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As most everyone knows, universities are very expensive in the US, with the average annual fee being nearly $30,000 – a terrifying price for anyone, even in the world’s richest nation where the average household income is about $53,000 per year. With significant scholarships nearly impossible to get, more and more families are turning to student loans to fund college.
The first option is what the federal government calls student aid, or more technically, federally subsidized student loans and federally unsubsidized student loans. Subsidized loans are given out to students who need financial help (which, you would think is everyone considering the numbers involved here) while unsubsidized loans are available to everyone. The amount you can borrow from either one is determined by your school.
Really the only difference is that the department of education pays for the interest of the subsidized student loans. The interest rates are between 3% and 4% fixed, which is a lot if you consider some people have to pay more than $100,000 in debt back. But regardless of how messed up that system already is, it pales compared to the horrors of private student loans.
Are the terms of private student loans reasonable?
Private banks charge up to 10% more than their actual costs to allow students to use the money. This seems absolutely insane considering that mortgages right now go for under 4% depending on your credit score.
Theoretically, the interest you pay should reflect the risk the lending bank is taking on behalf of giving you the money. This means that the bank should be taking on a lot of risk in return for charging that sort of interest rate. If we think about what you are buying with that money, an education (a nontangible asset that can’t be repossessed) it makes sense why they would charge that much. But if we look at the legal code, we find that private student loans are different from all other loans in that you cannot default on them… ever.
What happens if you can’t pay back your student loan?
You can declare bankruptcy as many times as you want, but you will never be able to free yourself from that yoke. So basically, this is a risk-free loan for the bank, and because 18-year-olds tend not to be very good at reading the fine print (or any financial information for that matter) banks apparently find it easy to slip these sort of grotesque numbers into multi-decade contracts. Assuming you don’t pay or can’t pay off your student loan before retirement (which might actually be a possibility given the job market right now), your social security checks go to pay off your loans based on a piece of paper you signed nearly 50 years earlier without reading the fine print.
I hate to say this, but it really is indentured servants all over again. It the end, this policy of the US is an anchor for the middle class and by extension the rest of the economy. Please be very careful when accepting a student loan, and if you are not sure, find a third party who can explain it to you. After all, you don’t want to be thinking about how you lived a great life in college and slaved away for the next 15 years to pay back those five years of fun.
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Felix von Wendorff studies econometrics as an international student at Goethe University in Frankfurt, Germany. He grew up in California and moved to Germany to take advantage of the great (and free) education system. In his increasingly shrinking free time, he enjoys running, budget traveling and reading.