Lenders must be wary when loaning to students

Student debt continues to be a growing problem.

According to a recent article in Forbes, two-thirds of students graduating from American colleges are leaving school with some level of debt. The average borrower will owe $26,600, and one in 10 graduate with more than $40,000. All told, students must repay $1.2 trillion—a number that many economists believe will drag on the economy for years to come.

It is important to note, however, that there are different kinds of student loans. Many young graduates have borrowed from the federal government, which is generally agreed to be the safer strategy.

“Federal loans are subject to income based payback, fixed interest rates, and take nine months to default on, making them a much safer loan for students to take,” Lauren Asher, president of the nonpartisan policy group TICAS, told the news source. Meanwhile, some private loans allow lenders to claim default only a month after the first missed payment. For this reason, economists worry more about the proliferation of private lending.

It seems that this trend will only continue. For a variety of reasons, both public and private four-year colleges are raising their tuition every year. Some of the most extreme examples are occurring in New Hampshire. There, according to a recent article in The Atlantic, 80 percent of students at the state’s public colleges borrowed money to fund their education.

Private lenders need to be careful about loaning money to students who stand a reasonable chance of paying it back. They should make use of risk assessment tools to make these determinations.

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