The Price We Pay for Private Student Loans

I met Mary in an American Lit class at Iowa State University when I was 23. We were the same age, both pursuing second degrees in education after obtaining first degrees from public universities. We became friends quickly and bonded over shared classes and a similar sense of humor.  

As our friendship grew, one big difference between us emerged. I had graduated with my first degree with about $20,000 in federal student loan debt. My parents went to college, were fairly savvy about interest rates, and were able to help me and my sibling pay for a portion of our college expenses. Mary’s parents, in contrast, had limited college experience, and while they supported their four children in attending college, they weren’t able to financially help them. Mary was, to a degree, on her own in navigating how to pay for school.  

By the time we graduated from Iowa State together in 2007, I carried about $35,000 in federal student loan debt, just shy of today’s national average loan debt for a single undergrad degree, while Mary’s debt stood at a staggering $74,000, almost exclusively in private student loans her parents co-signed on. While my debt maintained a stable interest rate of around 3.5% backed by the Department of Education, Mary lived at the whims of private loan variable interest rates that ballooned to 18% due to the financial collapse of 2008. While she was eventually able to consolidate her loans to 11%, Mary has spent the past 17 years paying those loans back to the tune of almost $800 per month. For 17 years, she has prioritized these loans over everything else to avoid putting her parents on the line for her debt.

In a recent phone conversation, she told me she’s thrilled that in a few months she will finally have her loans completely paid off. In the end, she will have paid back more than $150,000 for her $74,000 principal balance. 

Mary’s student loan catastrophe is not unusual. Hundreds of thousands of American high school students miss out on the security of Federal Student Loans every year because they lack the support to complete the FAFSA and understand their options to pay for college. While today’s Federal Student Loan interest rates are not a walk in the park (currently 6.53% for undergraduate loans), private students loans can be extraordinarily predatory, often offering initially low interest rates that can then skyrocket to as much as 18.5% due to variable rates subject to the whims of the market and the student’s credit history (or lack thereof). As of June 2024, the average private loan interest rate was about 11.14%.

What’s worse, student loan debt never discharges in bankruptcy. For many, the debt follows them to the grave. Beyond that, parents who co-sign for their kids’ private loans need to understand that the debt is theirs as well. If their child is unable to make the payments, the responsibility falls on the parents. And as morbid as it sounds, when parents co-sign on their child’s student loans, that debt doesn’t discharge even if the child dies. (Although it may sound dark, if you ever cosign for a loan for your child, strongly consider taking out a life insurance policy on the child for the amount of the loan with interest plus funeral expenses to ensure if the worst happens, you won’t also be saddled with debt while grieving the worst loss imaginable.)

When I talk with families about the realities of paying for higher education, these are all topics that come up. Navigating the process of figuring out what’s best for a student after high school is tough enough as it is. It is important to have honest conversations about finances and paying for college. In the end, it can save you or your student many thousands of dollars and years of stress like the ones my dear friend Mary overcame. (And many thanks to Mary for letting me share her story!)

QUICK COMPARISON: FEDERAL VS. PRIVATE LOANS

(student loan repayment information via calculator.net student loan interest calculator)