Private college loans gain popularity
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Students can avoid some confusion with a clear understanding of loan terms. In general, variable loans require borrowers to pay a certain margin over the rate of a specified index. The better their credit, in the eyes of lender, the less they'll pay. But typically, the index used is the prime rate, which is now 8.25 percent. As the index rises or falls, so does the interest rate that's owed on a loan.

The key: When shopping for a private loan, compare terms by finding out which index is being used plus the margin amount -- or number of percentage points you'll pay over and above the rate. Make sure you get the best out of private loans.

Bob Shireman, president of Project on Student Debt, says private lenders steer individuals away from such programs as the PLUS.

"Some of the companies are saying things like 'there's no scary federal forms to fill out,'" says Shireman. "By making it sound easy, and making it sound difficult to apply for or get a government loan, they get more borrowers."

The Web site for Alternative Student Loan in Quincy, Mass., which markets private college loans for a variety of private lenders, tells prospective borrowers: "No FAFSA or other government paperwork needed." The FAFSA is the government application for federal financial aid.

Harsh words
Michael Dannenberg, director of education policy at the New America Foundation, has harsh words for such pitches.

"Advertising that suggests bypassing the federal loan system is reprehensible. You can get a much cheaper loan from the government," says Dannenberg. "But people are taking out private loans when they're eligible for federal aid."

Private lenders aren't unaware of such criticism. Larry Lutz, from First Marblehead, whose clients often apply for loans through the Alternative Student Loan Web site, says his company makes it clear to prospective borrowers that federal funding may be available, and even cheaper, to them.

"If you get to our application instructions, we specifically have language that says to that borrower, 'As you determine the best way to finance your education, you should consider the full range of financial options available to you. Private loans are typically used to supplement federal student loans when the latter are not sufficient to cover the full cost of education.'"

But in order to see this disclosure, students have to work their way down from the Alternative Student Loan Web site to the actual online application process.

Other lenders attract borrowers by noting that private loan money can be used for computers, failing to note that federal loan money also can be spent on technology.

Loan to Learn, offered by EduCap, informed potential borrowers that loan money could be used on college expenses including "those not covered by most federal aid (computers, books, transportation)."

That statement caught the attention of the United States Student Association, which in September filed a complaint with the Federal Trade Commission against Loan to Learn for using "false and deceptive advertising practices."

"We want to ensure the lending industry will provide students with affordable loans and not mislead them while doing it," says USSA President Jennifer Pae.