The Terror of Private Student Loans in the US

Private banks charge up to 10% more than their actual costs to allow students to use the money. This seems absolutely insane considering that mortgages right now go for under 4% depending on your credit score.

Theoretically, the interest you pay should reflect the risk the lending bank is taking on behalf of giving you the money. This means that the bank should be taking on a lot of risk in return for charging that sort of interest rate. If we think about what you are buying with that money, an education (a nontangible asset that can’t be repossessed) it makes sense why they would charge that much. But if we look at the legal code, we find that private student loans are different from all other loans in that you cannot default on them… ever.

You can declare bankruptcy as many times as you want, but you will never be able to free yourself from that yoke. So basically, this is a risk-free loan for the bank, and because 18-year-olds tend not to be very good at reading the fine print (or any financial information for that matter) banks apparently find it easy to slip these sort of grotesque numbers into multi-decade contracts. Assuming you don’t pay or can’t pay off your student loan before retirement (which might actually be a possibility given the job market right now), your social security checks go to pay off your loans based on a piece of paper you signed nearly 50 years earlier without reading the fine print.

I hate to say this, but it really is indentured servants all over again. It the end, this policy of the US is an anchor for the middle class and by extension the rest of the economy. Please be very careful when accepting a student loan, and if you are not sure, find a third party who can explain it to you. After all, you don’t want to be thinking about how you lived a great life in college and slaved away for the next 15 years to pay back those five years of fun.

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