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Students are relying more and more on private lenders
to fund their college educations. Last year, private college loans
totaled $17.3 billion and accounted for one out of every five dollars
borrowed for college, according to the College Board. A decade ago,
private lenders provided only 4 percent of college loan money.
Soaring college costs are driving the trend. When
Sharlyne Woodbury was accepted to Northeastern University, she scrambled to scrape
together cash for tuition and fees. Government loans helped, but because they
have borrowing caps, her financial aid adviser recommended supplementing federal
aid with private loans. Woodbury quickly agreed, signing the
dotted line on a $19,000 deal. Woodbury's case isn't unusual.
"The cost of attending college is increasing
more rapidly than grant aid, federal loans and families' ability
to pay," says Sandy Baum at the College Board. "Since
those three components aren't growing as rapidly as college costs,
there's a gap that's being filled by private loans."
But while private loans make higher education possible
for many, they're triggering alarms, too. Critics say lenders
entice borrowers with slick advertising that's unclear and, at times, downright
misleading. Financial aid officers also have come under fire for not guiding students
away from trouble. Meanwhile, many students are saddled with private loan debts
they can't afford. Take Woodbury, 25, who borrowed $71,000
in three separate private loans. They now cost $530 a month to repay. Since that's
too expensive, Woodbury recently spent $150 for a forbearance, which lets her
suspend payments for up to six months. "It's been a total
nightmare," says Woodbury, who hustles two jobs as an office temp and coffee
shop attendant. She hopes to land a better-paying gig in time to resume loan payments. How
to avoid such a scenario? To be sure, students should read carefully before signing
the bottom line on any loan agreement. But knowing how to analyze deals and payment
terms, asking the right questions, and being aware of all the financing options
available for college can help, too. Federal
financial aid: limits and myths
Government Stafford loans are a popular option for students. In
the 2005-2006 school year, more than 6 million undergrads borrowed
money through the Stafford loan program, to the tune of $37 billion.
Those issued since July 1 of last year come with a fixed 6.8 percent
rate, and most students can get one. The bad news: They may not
provide enough cash to cover costs.
For the 2007-2008 school year, students who are still
their parents' dependents may borrow up to $3,500 the first year
of college, up to $4,500 the second and $5,500 during both their
junior and senior years.
Those Stafford caps have become a big selling point among
private lenders.
"Borrow up to $130,000 in student loans,"
reads a Web site for NextStudent Inc., a Phoenix-based lender. "Get
your money fast."
Nevertheless, the federal funding gap may be the biggest
myth driving the private loan industry. Contrary to popular belief,
it is possible to obtain lots of financing from the government.
The catch: Parents need to get involved, says Cindy Bailey, executive
director of education finance at the College Board.
"The PLUS loan should be
your first choice, after the Stafford," she says.
Available to parents of undergrads and to grad students
directly, the PLUS loan generally lets borrowers obtain as much
as they need, minus financial aid, says Bailey. Moreover, since
July of last year, the PLUS features fixed interest rates, so costs
won't spiral out of control. Rates are set at 7.9 percent or 8.5
percent, depending on the loan program offered by the school. Both
rates are cheaper than many private deals, Bailey adds.
Experts say that a typical rate for a private loan
now runs in the neighborhood of 10 percent to 11 percent. Students
with weak or poor credit pay as much as 16 percent to 18 percent
to borrow. No matter how expensive they are, nearly all private
loans have variable rates. That means, unlike the government PLUS
loan, rates on private deals will fluctuate.
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