Know the risks of private student loans

People should not consider getting a personal loan until they have reached federal student loan limits and still need additional education financing, Kantrowitz said. (The maximum amount a student can borrow on government loans in an academic year is typically $12,500.)

However, Kantrowitz said, “Borrowing from private individuals can be a sign of over-indebtedness, so they should do so with caution.”

As a rule of thumb, students should not take out more loans during their studies than they expect as the starting salary. You can look up yearly Average income for different occupations on the US Department of Labor website.

Scott Buchanan, executive director of the Student Loan Servicing Alliance, a trade group for government and private lenders, said private student loans could fill the gap for those who have exhausted government aid and grants.

“But you have to do your research like you would with any other loan and make sure you never borrow more than you absolutely need,” Buchanan said.

Federal student loans offer a variety of protections, including Forgiveness programs and interest deferrals that most private lenders don’t offer, said Betsy Mayotte, president of The Institute for Student Loan Counselorsa non-profit organization.

“We almost always advise against personal loans,” Mayotte said in a previous interview.

She also described strict conditions that private lenders could enforce.

“If you can’t make the payments, the lender can sue to get access to garnishment of wages or confiscation of assets like bank accounts, and that applies to both the borrower and the co-signer,” Mayotte said.

As Mayotte pointed out, many private lenders require students to hire a co-signer who is equally liable for the debt. If there are payment difficulties, both are on the hook.

“I hear weekly from borrowers and co-signers who can’t afford the payments and there are just no options I can offer them,” she said.

Personal student loans can have fixed or variable interest rates. Your rate may depend on your or your co-signer’s creditworthiness, income and financial history.

“Basically, borrowers should prefer a fixed interest rate “An environment of rising interest rates, although floating rates may start lower,” Kantrowitz said. “Floating rates can only go up.”

Official estimates of average interest rates on personal student loans range from 4% to 15%. after to the Education Data Initiative. For comparison: Federal student loans for students are currently available an interest rate of 5.5%.