Think Twice Before Taking Out a Private Student Loan

Factors like customer service should also be considered, Mr. Kantrowitz said. Is there a help line if you need to reach someone on the weekend? Can you update your address or contact information online?

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

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

Here are some questions and answers about student loans:

Mr. Kantrowitz recommends that your total student debt should be less than your expected first-year salary. If your debt is less than your annual income, you should be able to repay your student loans in 10 years or less, he said. If you anticipate earning $55,000 — the average starting salary for a four-year college graduate in 2021 — the total of your loans should fall below that amount. A similar rule applies to parents, he said. They should borrow no more, for all of their children combined, than their annual income.

Interest rates on federal student loans are set annually and apply to all new loans made during a given academic year. The rate is fixed for the life of the loan. Rates for undergraduate direct loans are currently 3.73 percent. But they are expected to jump to 4.99 percent for loans made starting July 1 through June 2023. (Rates on federal loans are set each spring and are tied to the 10-year Treasury note, using a formula set by law. The Education Department hasn ‘t officially announced the new rates, but Mr. Kantrowitz and others are projecting them based on the 10-year Treasury bond auction that took place on 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 first-year maximum of $5,500 and repaying the debt over a standard 10-year term, according to’s loan estimator .

Rates on private loans vary by lender. Many are currently advertising fixed rates ranging from 3.2 percent to more than 14 percent, and variable rate loans starting around 1 percent. But rates on both fixed and variable rate private loans are expected to rise as the Federal Reserve continues raising its benchmark interest rate, said Greg McBride, chief financial analyst at Bankrate. “Private student loans are on the way up as well.”

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