Fixed-Rate Private Student Loans - Worth It?

There’s a new kind of private student loan in town, with pros and cons that should be weighed before signing up. Wells Fargo and U.S. Bank have recently rolled out fixed-rate student loans to attract more consumers, as the private loan market continues to lose ground to the federal government, which is currently offering subsidized loans with a hard-to-beat 3.4% fixed rate.

Still, at least these two banks are trying their best to provide more options to consumers.

Wells Fargo has announced fixed-rate options for several of its existing education loans. Fixed rates range from 7.75% to 14.25%, depending on the applicant’s credit worthiness. The better your credit, the lower your interest rate. The bank’s variable rate loans, meanwhile, carry rates between from 3.50% to 12.74%.

U.S. Bank’s fixed-rate student loan carries a 7.99% interest rate, subject to a credit approval. The bank’s variable rate loan options range from 3.45% to 10.95%.

Are they worth it?

[Article: Government Profiting From Student Loan Defaults?]

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First, the pros: Private student loans typically carry variable interest rates, which can fall or rise based on a benchmark rate—either LIBOR or the prime rate—so these new fixed-rate loans do eliminate some risk. You’ll sleep better at night knowing your monthly payment will remain flat no matter how much the market fluctuates. And since rates are expected to rise in the coming years, as the economy recovers, variable rate loans could turn ugly.

The cons are that private loans, whether fixed or variable, can be seriously risky. Interest rates aside, private loans often require a cosigner if the borrower doesn’t have excellent credit (and at 18 years old, who does?). That means you and usually a family member will be on the hook for payments. Additionally, there is no law saying that banks are required to discharge private student loans when the borrower dies. Instead, they become part of the borrower’s estate and get paid through the estate settlement process. If the loan has a co-signer it may end up being that person’s financial obligation.

Conclusions: Private student loans—fixed or variable—should always be a last-resort for borrowers who still need to fill the aid gap after using federal loans, grants, scholarships and personal savings.

For more, check out my recent post on the best ways to save and pay for college.

[Related Article: 7 Savings Tips for College-Bound Students]

Image: Steve Snodgrass, via Flickr.com