For some college students, federal aid just isn’t enough.

After maxing out federal loans, more and more college students are turning to private loans to finance their college educations.

To get a good deal on a credit-based private loan you’ll need to shop carefully. Interest rates and fees vary widely. And you may need the help of a creditworthy co-borrower, such as a parent, to snag one of the better deals.

“It’s important for students to be as informed as possible,” says Ronald W. Johnson, financial aid director at the University of California at Los Angeles. “Don’t assume one private loan is like another.”

College students borrowed over $56 billion in federal loans in the 2003-04 school year, and $11.3 billion in non-federal loans, according to the College Board.

Nellie Mae reports that while private loans make up only 9.2 percent of student aid, students that do turn to private loans are borrowing quite heavily. The average debt level of a student who borrowed with a private loan in their undergraduate years is a whopping $41,900.

“Many students are being compelled to take out private loans by outdated and insufficient federal student loans,” says Marie O’Malley, a vice president of marketing at Nellie Mae.

Rising cost, rising debt

Many students turn to private or alternative loans after exhausting federal borrowing options. Despite climbing college costs, the borrowing limit on federal Stafford loans has not increased in a decade. The Stafford program is the largest source of student loan funds in the country.

“It’s just simple math,” says Carl Buck, vice president of financial aid services for Peterson’s. “The cost of attendance, particularly at private institutions, has gone up significantly and you don’t have the federal aid programs increasing their maximum borrowing lines at all.”

Undergraduate students that depend on their parents for financial support may borrow $2,625 in Stafford loans in their freshman year, $3,500 in their sophomore years and $5,500 in their junior and senior years.

“Many students simply need to borrow more than that so they turn to private loans,” says Sandy Baum, a professor of economics at Skidmore College and co-author of a recent study on student loans. “They’re also turning to credit cards.”

Federal student loan borrowing limits may have been fine over 10 years ago. Back in 1992-93, public universities charged $2,334 in tuition and fees and private colleges charged $9,340.

Today, public universities charge an average of $5,132 (up 10.5 percent from last year) in tuition and fees. Four-year private colleges charge $20,082 (up 6 percent from last year) in tuition and fees. Toss in room-and-board expenses, and the total cost for a student, at a public university, averages $11,354 and at private colleges, $27,516. It’s easy to see how a college student could be stuck with a steep education bill even after taking out a federal loan.

— Updated: Aug. 11, 2005

Another reason more students are turning to private loans is their parents may be unwilling or unable to pay for college expenses.

“The private loan substitutes for the parent doing any kind of contributing,” says Linda Peckham, the College Board spokeswoman for financial aid issues.

Some families prefer that a son or daughter borrow for college rather than the parents. And some parents just can’t fit another loan payment into their monthly budget. The best they can do is to offer to help the student with private loan payments, which would start a few months after graduation.

“A lot of times families are turning to these instead of the parents doing the borrowing,” Peckham says. “The entire cost of education is being paid for by the dependent student.”

Private loan lessons

Students turning to private loans to pay for college will want to do plenty of research before signing on the dotted line. Interest rates, fees, repayment terms and borrower benefits vary from private loan to private loan.

“People really do need to do their homework by making side-by-side comparisons,” Buck says. “Really lay out the paperwork and select the best choice. Read the fine print.”

All private education loans are credit-based loans. The interest rate you pay on a private loan depends on your credit, so the better your credit, the lower the rate you’ll pay. Interest rates on private loans typically range from 4 percent to 15 percent.

Students with excellent credit can expect to pay interest rates in the 4 to 6 percent range.

“If your credit isn’t stellar you might pay more, but it’s still generally a single-digit number,” says Daniel Meyers, chief executive officer at First Marblehead, a Massachusetts company that manages and finances private education loan programs.

Some students may need a co-signer to qualify for a private loan.

“Different lenders require different things,” Peckham says. “Several of them are going to require a parent as a co-borrower.”

Even a student that qualifies for a private loan on their own may want to consider getting a co-signer anyway. Signing on with a creditworthy co-signer could mean a lower interest rate and lower fees.

For example, a Signature Loan from College Board charges up to a 6-percent repayment fee for students who borrow on their own. Student borrowers with co-signers pay no such fee.

A student’s major or area of study may influence repayment terms as well. One lender may view a pre-med student as a safer risk than, say, a philosophy major. Another lender may charge a law student a slightly higher interest rate than a graduate business student.

And that’s why it’s so important to begin your private loan search at your school’s financial aid office. An aid counselor may be able to direct you to lenders that offer favorable loan terms to students in your area of study. There’s also a good chance your college will have negotiated favorable loan deals for its students with one or more lenders.

And just as importantly, a financial aid counselor will double-check to make sure you’ve exhausted all your federal aid options. A private loan should be your last resort.

“We don’t want them to get into a private loan situation when they don’t have to,” Johnson says.

Private loan shopping

If you’re certain you need a private loan, you may want to do some shopping around on your own.

The Internet makes it easy. All you have to do is type in “private education loan” on any search engine and a whole slew of lenders will pop up.

Don’t forget to check your university’s Web site. Some financial aid departments list private loan information online.

You’ll also want to check to see if your parent’s bank offers private education loans. Having a co-signer who is a longtime bank customer may land you a lower rate on your loan.

“Always try to check prices and costs from a few different programs,” Meyers says.

Be sure to study the fine print of every deal. What kinds of interest rates are available?

Does the loan charge a disbursement fee or a repayment fee? A disbursement fee is a fee that’s charged once your student loan check is cut. A repayment fee kicks in when it’s time to start paying on your loan.

Keep in mind that the terms offered in big, bold letters are probably reserved for people with squeaky-clean credit. There’s no guarantee you’ll qualify for that rock-bottom rate, even with a co-signer.

“Be a bit cautious of marketing gimmicks, things designed to catch people’s attention,” Meyers says. “Be a little careful. I wouldn’t instantly assume you’re going to get all the benefits of the loan.”

— Updated: Aug. 11, 2005

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