More small banks offering student loans

Different interest rates and borrower benefits

Kelly Tanabe, co-author of "1001 Ways to Pay for College," says that when it comes to choosing a loan, students should investigate borrower benefits in addition to interest rates and repayment terms.

"Private loans really vary a lot between institutions, but in general, smaller institutions, credit unions in particular, may offer a lower interest rate, but might not offer the same borrower incentives as larger banks," says Tanabe. "Students (who go to community institutions) could miss out on incentives like a lower interest rate after a certain payback period or a discount on fees if you pay by direct deposit. But if their interest rate is lower throughout the life of the loan, those things might not matter."

To compare apples to apples, Tanabe advises students to shop around and ask both large and small lenders for the total amount a loan will cost, including fees, interest and discounts.

First exhaust federal options

Before considering a private loan from a community institution or otherwise, Lauren Asher, president of the Institute for College Access and Success in Berkley, Calif., advises students to investigate their federal loan options, including Parent PLUS loans and loans offered through the college directly. Shop around to both large and small institutions before making a fiscal commitment.

"No matter where you go to find a loan, federal loans always offer better interest rates and borrower protections than private ones," she says adding that 64 percent of all undergrads with private loans take them on without maxing out the federal loans they're eligible for. "Regardless of who the lender is, private loans need to be evaluated individually and checked against offers from other banks. In the end, they should really be a last resort."

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