‘Shadow’ lenders can leave college students in the dark
A new high school graduate may take out about $37,200 in student loans for college, according to a recent NerdWallet study.
And for many of them, that won’t be enough.
Thirty-eight percent of students borrow additional money for college via credit cards, home equity loans and other non-student loans, according to a May 2020 report from the Federal Reserve.
The Student Borrower Protection Center, a Washington, D.C.-based nonprofit, has dubbed this the “shadow education finance market” because these options can lack transparency.
“A lot of these entities are operating with very little accountability or oversight,” says Seth Frotman, executive director of the SBPC.
If you need loans to cover unexpected costs or attend a school that doesn’t qualify for traditional loans, here’s how to make sure you understand what you’re borrowing — and whether the investment will be worth it.
Spot unfavorable terms
The line between student loans and loans marketed toward students can be murky. Frotman says the latter are often just personal loans.
You could pay much more if you can’t tell the difference.
For example, if you borrowed a $2,000 personal loan at 20 percent interest, you’d repay $3,179 over five years. A private student loan at 10 percent — roughly the highest current rate — would save you more than $600 over the same time frame.
The easiest way to avoid the shadow market is to borrow from the federal government. You can apply for federal loans by completing the Free Application for Federal Student Aid, or FAFSA.