Student loans; If the deal sounds too good to be true, it usually is!

Some Lenders Attempting to Bury Students in Debt for Life

The old adage that "if a deal sounds too good to be true, it probably is" certainly applies to student loans. Some lenders are now advertising directly to students, attempting to get them to take out enormous amounts of debt that will take up to 20 years to pay back. And the advertising says very little about monthly payments or interest rates. Instead it focuses on all of the great things that the students can do with all that money while they are in college.

You may have seen some of the latest student loan advertising that has been circulating on late night television and on YouTube. The messages don't talk about financial responsibility. Instead, they focus on the here and now, talking to students about buying a new computer and improving their lifestyle. At least one of the ads on You Tube that we have looked is clearly designed to put fear into students about their current living expenses.

The hook that some lenders are using is that students can take out up to $40,000 per year in addition to federal student loans, but that they can defer payment until after graduation. Frankly, that's a very bad idea. Not only will students and their families be saddled with repayment requirements from their federally backed student loans, but they will then have additional amounts due, up to $130,000, from private loans.

There are a variety of problems with the pitches the lenders are using. This includes the fact that interest rates and repayment terms are often buried in student lending sites and not easily accessible from site navigation menus.

The interest rates on these private loans are running around 9.25% and the payment terms are up to 20 years. For a student that takes out $130,000, that's $1,100 a month in payments until sometime after their 40th birthday. By the time the loan is paid back, that student will have paid $281,000 in finance charges in addition to the original principle borrowed. That means total payments of over $410,000 for the life of the loan.

According to a study conducted by EducationAtlas, the average adult with a four year college degree makes a little over $45,000 per year. Typically, annual earnings are lower as people enter the workforce directly after completing their education. According to the National Association of Colleges and Employers, the average graduate who is fresh out of school make $30,330 in 2005. By the time an average student makes his or her monthly payments for the $130,000 borrowed from private lenders, and then makes any additional payments for other loans and credit used during school, they will be lucky if they can live above the poverty line.

As with purchasing a home, a college education is not just an investment. It is also an emotional decision. Any time that emotions are used to make a large purchase, there is significant chance that a mistake will be made. This is the time when parents really need to get involved.

Private lenders are very pointed about the fact that they would prefer that parents co-sign with their children on loans. This means that the parent is also obligated to pay the money back, regardless of how the student chooses to spend it. One of the primary selling techniques used by lenders is that they tell students that they will send their checks directly to the student. I don't know about you, but as a parent I don't like that idea at all and wouldn't agree to sign a loan with that type of provision.

Just because your child wants to go to the most expensive or exclusive school available, that doesn't mean that choosing that school is a wise decision. Parents really need to speak to their children about the issue surrounding affordability prior to sending out college applications.

Likewise, taking out a loan that is not necessary is also a bad idea. Parents need to look at the actual costs of going to school. These should include tuition, supplies, room and board. Everything above this is optional.

Parents also need to be aware that there are other loan and grant options that may be available to them. Among these are government grants, which never have to be paid back, and home equity loans with provide the benefit of keeping the parent in control of the amount of money available to the student.

Of course, there is nothing to prevent adult children from taking out loans of their own, without parental oversight. That being said, you should make it perfectly clear to your child if you will place any limitations on the help you will provide them to pay this type of loan back. College should provide a well rounded education and it really should be a lot of fun. But it shouldn't turn into an excuse to spend till the cows come home. That's especially true if you, the parent, are being asked to repay that borrowed money.

By: Guest blogger: Jim Malmberg, Executive Director, ACCESS
American Consumer Credit Education Support Services