Paying for college with private loans

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"Many students are being compelled to take out private loans by outdated and insufficient federal student loans," says Marie O'Malley, a vice president of marketing at Nellie Mae.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

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