Kick your private loans to the curb

With a record number of students taking out government and private loans this year, concerns over the future payments of these loans are rising. While it is nice to live in a fantasy world where your student debt doesn’t exist until you graduate, it is crucial that you have a deep understanding of how to manage your debt now in order to prepare yourself for a smooth transition upon graduation.

One of the biggest regrets many students graduating college with debt have is that they took out too many private student loans. Unlike subsidized and unsubsidized government loans, private student loans are predatory and the only goal is for the loan company to make money.

This doesn’t mean the government doesn’t make money on their loans (trust me, it’s a huge source of income), but profit is not their main concern. The government just wants you to be able to afford college. On the other side is private student loan companies like Sallie Mae, Discover and Wells Fargo. The main objective of these companies is to make money.

In recent years, the most lucrative way of doing this is to offer a multitude of easily-obtainable student loans to unsuspecting college students. This is happening every day across the country and it is destroying the future financial health of college students. So how can we help alleviate this? There’s a few options for students who are still in school.

When it comes to loans, the lower the interest rate, the better. On average, government loans will have interest between four and six percent. Your typical private loan right now will range from eight to 10 percent and could go higher if you have an adjustable rate loan versus a fixed rate.

You want your loan to have the lowest interest rate possible. This makes it easier to get through government loans, so the concept of ‘lumping your loans’ comes into play. Plain and simple, this basically means shifting your debt around so that you have one lump sum loan with a lower interest rate.

For those of you with only government loans, I urge you to avoid taking out private loans unless there is no other option. If you already have private loans, a good tip, if you think it will work in your favor, is to essentially take out a low interest student loan through the government. Use that money to pay off your private loans now, before any more interest can accrue on them.

This might help to clarify. Say you have $10,000 in government loans at five percent interest. In addition, you have $5,000 in private loans through Sallie Mae at eight percent interest. Repaying both loans in a ten year schedule would result in a total paid of $20,300 ($5,300 of that being interest). Instead, by paying off that $5,000 Sallie Mae loan and creating one lump $15,000 government loan, you will end up with a total paid of $19,000 ($4,000 of which being interest). Thus, you can save a decent $1,300 just by making this simple switch.

At the end of the day, no one wants to take on debt to get through college. Unfortunately, it is a reality many of us must accept. To help reduce stress and hassle, I urge you to reconsider when taking on a private loan of any kind. Always borrow smart and remember the private loan companies are out to make money on you and don’t have your best interests in mind. They may seem to want to help “finance your college degree” when in reality all they want from you is that $300 check each month after you graduate.