Few people associate the words “predatory lending” with college students and school loans, but predatory lending in the area of student loans is a growing concern. Alan Collinge points out in his book “The Student Loan Scam: The Most Oppressive Debt in U.S. History and How We Can Fight Back” that the default rate for student loans ranges from 19% at four-year public colleges to 51% at private, for-profit colleges. When default rates on any type of loan is that high, it’s usually a dead giveaway that there’s something wrong with the lending, not the borrowers.
Predatory school lenders count on borrowers who are unsophisticated enough not to recognize their unscrupulous practices. You can protect yourself from predatory lending by educating yourself on those practices and by asking important questions before you sign the papers to accept any student loan. These ten tips will help you avoid predatory school loans.
- Learn all you can about the different types of loans available for your education. Knowledge is your strongest ally.
- Research deceptive lending practices so that you’ll recognize them. Beware of bait and switch loans, interest-only loans and loans with balloon payments. They each have their place, but many lenders offer them to unsuspecting students and parents who don’t fully understand how they work.
- Use federal student loans first. They carry lower, fixed interest rates and offer options for deferment and consolidation after you leave school.
- Request the interest rates for any loans you are considering in writing. The financial aid offices at many schools don’t mention interest rates at all.
- Ask the financial aid office for the names of whom they work with and research them to find out if they have been named in any class action suits with regards to student loans.
- If the school provides you with a preferred lenders list, ask the financial aid officer how the school decides which lenders are added to the list. Again, do your research. District attorneys in several states have found that lenders often offered kickbacks to schools in return for being listed on the preferred lenders list.
- If you must take out student loans from private lenders, ask for loan quotes from several lenders and compare them with each other. Insist that each lender provide you with the interest rate you’ll be paying and the total cost of the loan so that you’ll be comparing apples with apples.
- Avoid loans with low teaser interest rates. Many lenders offer student loans with a low interest rate through graduation or for a number of years after graduation. If you do choose one, find one that specifies the interest rate to which your loan will adjust so you’re not surprised in five years.
- Choose a fixed rate interest loan. Adjustable or variable interest rate loans can be tempting because they often start out at lower rates than fixed rate loans, and it’s easy to believe that there’s a chance the interest rate will go down in the future. In reality, it’s far more likely that the interest rate on your student loan will continue to rise.
- Never sign anything you haven’t read carefully and understand fully. Don’t let a financial aid or loan officer tries to pressure you into signing before you’ve read the full loan agreement.
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