With college growing more and more expensive by the day, many students have no choice but to take on debt to finance their education. And unfortunately, today's federal loan limits keep many students from accessing the financing they need to obtain their degrees.
An estimated 70% of U.S. colleges charge tuition and fees that exceed the existing federal student loan limits for undergrads, according to a new report by Student Loan Hero. Currently, dependent students, those whose parents list them as dependents on their tax returns, can borrow up to $5,500 in direct subsidized and unsubsidized federal loans as freshmen. The limit increases to $6,500 as sophomores and $7,500 as third-year students and beyond. All told, dependent students can take out up to $31,000 in federal loans -- but that won't do the trick in paying for most colleges in full.
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Case in point: The average in-state public college costs $9,970 for tuition and fees alone, according to data from The College Board. That far surpasses the federal loan limits imposed on dependent students. Furthermore, that figure doesn't even account for room and board, books, transportation, and other common expenses that students typically incur. And let's not forget that $9,970 is well below what the average out-of-state four-year college or private university will charge on the tuition and fee front.
All told, only 6% of U.S. colleges charge tuition and fees that fall below the existing dependent student federal borrowing limits, leaving countless students with no choice but to seek alternative means of funding their degrees. And that's where so many borrowers get into trouble.
The problem with private student loans
Students who exhaust their federal borrowing options are generally inclined to turn to private lenders to get the money they need for college. But that's typically a costly mistake. For one thing, private loans tend to come with much higher interest rates than federal loans. Federal loans' interest rates are regulated to ensure that they linger in reasonable territory; private lenders aren't subject to that same requirement, and so they can charge exorbitant interest rates and get away with it.
Furthermore, whereas federal loan interest rates are fixed, private loans often come with variable interest rates that can climb over time. This situation can make paying them back even more difficult.
Not only that, but private loans also don't impose borrowing limits, which means students are free to rack up as much debt as they choose. And unlike federal loans, private loans offer no borrower protections. So if you lose your job or suffer a financial hardship, you'll still be on the hook for your monthly loan payments. Federal loans, on the other hand, offer deferment programs and income-based repayment plans that give borrowers more flexibility for keeping up. And that no doubt saves many from the unwanted fate of defaulting on their debt and ruining their credit in the process.