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How to Avoid Predatory Student Loans


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A college education is an expensive undertaking. The average student receives over $37,000 in student loans to pay for college in America.

That’s a lot of money on its own. But the reality is that nearly 40% of college students take on additional debt in the form of credit cards and other personal, non-student loans.

The market for non-student these loans has been growing in recent years, and it’s now comprised of $5 billion in bad loans. That fact has earned it a concerning alias — “shadow lending.”

What is a Shadow Lender?

A shadow lender looks and acts a traditional bank or financial institution, with one big caveat — they aren’t held to the same regulatory standards as banks. This often means the loans they offer are risky and high-interest.

In the education finance market, shadow lenders target college students because they know they’re likely in need of additional funds to pay for school. This is especially true of students who attend a non-accredited school (usually a “for-profit” school), which disqualifies them from receiving federal student loans.

But any college student can run into unexpected expenses and be tempted to sign up for loans with poor repayment conditions and high interest rates.

How to Spot a Shadow Lender

When securing financial aid for your student’s education, you and your student should be on the alert for bad terms that could signify you’re dealing with a shadow lender.

The biggest indicator that you might be looking at a shadow loan is the extremely high interest rate.

The average student loan interest rate is 5.8%. Federal student loans for undergraduates have an interest rate of around 2.75%, while private student loans are a bit higher.

A personal loan from a shadow lender, though, will likely have a much higher interest rate, as high as 36%!

Other surefire signs that you’re looking at a shadow loan include:

  • They don’t perform a credit check or ask for a co-signer
  • Monthly payments are unaffordable
  • The small print in the agreement includes various fees that aren't mentioned anywhere else — these may be monthly processing fees or application fees, which will not appear in legitimate loans
  • The lender requires you to sign up for autopay — this is against federal student loan laws
  • The school itself is urging your student to work with a certain lender — this is only likely with for-profit schools, who avoid accountability when their students work with shadow lenders vs. federal loans

The Consequences of Taking on Predatory Student Loans

Shadow lenders tend to target college students who don’t qualify for traditional loans because they don’t have good credit, a high enough salary, or enough assets on hand. This means the lendee is actually less likely to be able to pay back the loan!

If your student gets into a situation where they can’t make payments on a shadow loan, the lender is likely to aggressively pursue repayment. They may even put a lockdown on your student’s transcripts until payments are made.

Even after your student graduates, the lender can make the college or university take back your student’s certification if they fail to make payments. And shadow loans typically include a clause that prevents you and your student from filing a predatory loan lawsuit to sue the lender when they engage in these practices.

Avoiding Shadow Loans

The best way to avoid a shadow lender is to stick to federal student loans and private student lenders that have a history with your student’s school.

If your student’s school is not accredited and your student doesn’t qualify for federal loans, it may be a bad idea to attend that school. Universities and community colleges that are accredited can connect your student with access to legitimate financial aid.

There are some exceptions, such as a computer coding program. It could very well be an amazing program that simply doesn’t qualify for federal aid.

Unsure whether your student’s school of choice is a low-risk, quality option? The U.S. Department of Education’s College Scorecard website makes it easy to check on a school’s graduation rate, average debt of enrolled students, expected monthly payments after graduation, and much more.

Saving Money on School to Minimize Debt

The more money your student can save while in college, the less likely they’ll be in need of additional loans, some of which could be shadow loans.

Fortunately, there are many ways to cut down college expenses, from buying used text books and making the most of the school’s free facilities to testing out of classes and getting scholarships.

Read our guide to 15 unique and creative ways to save money while in college >

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