How to Avoid Risky Student Loans

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In January 2022, student loan servicing company Navient reached a settlement with attorneys general from 39 states in which it will cancel $1.7 billion in private student loan debt. On top of that, Navient will provide $95 million in restitution to roughly 350,000 federal student loan borrowers.

The settlement is expected to resolve six lawsuits, in which the Consumer Financial Protection Bureau (CFPB) and attorneys general alleged that the company had engaged in abusive practices. In particular, Navient was accused of handing out private student loans to more than 66,000 borrowers who it knew would struggle to repay the debt. The loan servicer also steered federal loan borrowers toward forbearance instead of more fitting relief options like Public Service Loan Forgiveness and income-driven repayment plans.

For many college students, getting through school without student loans isn't an option. But there are situations where it may be riskier to take on student loans. To avoid these situations, it's best to prioritize federal loans, avoid for-profit universities and educate yourself about potential red flags. Here's how:

Prioritize Federal Student Loans

While Navient was accused of engaging in some abusive practices toward its federal student loan borrowers, the bulk of its settlement involves forgiving $1.7 billion in private student loan debt.

That's not to say that private student loans are a scam. In fact, most private student loan companies are legitimate. But for both undergraduate and graduate students, federal student loans provide more relief options for borrowers who have trouble with keeping up with their payments.

Also, federal loan interest rates are standardized, so if you don't have great credit, you don't have to worry about dealing with high-interest private loans that can put more strain on your budget.

Avoid For-Profit Universities

The CFPB and attorneys general claim that Navient issued high-interest loans to students who were attending predatory for-profit colleges. According to the Center for Analysis of Postsecondary Education and Employment, for-profit schools tend to charge higher tuition than public universities and have just a 35% completion rate, compared with 65% at public four-year universities and 76% at private four-year institutions.

Critics have accused for-profit universities of hiring unqualified faculty, enrolling unprepared students, using manipulative sales tactics and more.

The U.S. Department of Education has provided federal loan forgiveness in several instances for borrowers who attended for-profit colleges under the Borrower Defense to Repayment program. And students who attended these schools have a disproportionate share of federal student loan defaults.

All that considered, both federal and private student loans may pose a higher risk in your future if you use them to attend a for-profit college versus a public or private four-year university.

Carefully Read the Loan Terms

As previously mentioned, federal student loans provide several protections for borrowers, but private student loan terms can vary by lender. As such, it's important to make sure you read through all of the terms and conditions of a loan before you accept it.

Watch out for things like forced arbitration clauses, which limit your rights in the event that the lender violates the law or the contract. Also, make sure you know what forms of recourse you do have when you have a dispute with your lender.

Read Borrower Reviews

You can't choose your federal student loan servicer when your loans are first disbursed, but you can choose a new one through the Direct Loan Consolidation program. And if you're considering private student loans, you get to choose which lender you decide to work with.

In either case, take a moment to read reviews from current and former borrowers using a given servicer or lender. If the company you've been assigned or are planning to apply with has a history of poor practices in how they deal with borrowers, you may want to look elsewhere.

Also, do an internet search to find out if the servicer or lender has been sued by federal or state regulators. While individual customer reviews provide anecdotal evidence of misconduct, regulatory action can give you some insight into widespread illegal practices that the servicer has engaged in consistently.

Learn About Borrower Relief Options

If you're having a hard time with your student loan payments, don't rely on your lender to educate you about your options. It's an unfortunate reality, but regulators have repeatedly called out and sued federal student loan servicers for engaging in some of the same behaviors that Navient is now providing restitution for.

Instead of relying on your servicer, read up on what options are available to you and consider your situation to determine the best course of action.

If you have private student loans, relief options are scant, but many lenders provide forbearance of some kind. If you have federal student loans, learn about income-driven repayment plans, extended consolidation plans, loan forgiveness, repayment assistance programs, and more.

The more you understand about what you can do if you're struggling, the easier it will be to spot bad or even illegal practices when you come across them.

Take Steps to Reduce Your Reliance on Student Loans

The best way to avoid long-term struggles with student loan debt is to reduce your reliance on them to pay for school. There are many ways to avoid using student loans, including:

  • Apply for scholarships through your school and through private organizations; use search engines like and Fastweb to find options among millions of opportunities.
  • Fill out the Free Application for Federal Student Aid (FAFSA) to see if you qualify for grants, which, like scholarships, you generally don't have to repay.
  • Attend a less expensive school to reduce your overall costs.
  • Work while you're in school with a part- or full-time job that you find on your own or through the federal work-study program.
  • If you're a graduate student, look for fellowship and assistantship opportunities that can provide you with some income as you do work related to your field of study.

Good Credit Can Help You Secure a Good Deal

If your credit is in bad shape, you're more likely to have a hard time finding favorable financing to help pay for your college education. This is especially true if you're thinking about taking out a private student loan.

Check your credit score to get an idea of how healthy your credit history is, and review your credit report to see if there are any problem areas you can address. The process of building and maintaining good credit can take time, but the savings and peace of mind are well worth it.