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Private Student Loans a Larger Share of Education Finance Pie 

Friday, November 16, 2007

So, by now, you know all too well that college costs are growing at a pretty rapid clip... by over 6% at both public and private 4-year colleges this year. So how have college-bound students and their parents been dealing with this increase in tuition. It turns out that the most common method has been private loans. Unfortunately, taking out a private student loan is the most costly way to finance a college education (except for credit cards, but we hope none of you are putting your tuition bill on your credit card).

Over the last 10 years, federal aid programs for undergraduates have grown by an average of 5.6% a year, according to the College Board. Not too bad... the federal government seems to have been chipping in some extra dough for students to go to college over the last decade. However, over that same period, private loans used to finance a college education have grown at a rate of more than 25% a year, according to the College Board.

We don't want to harp on the negatives too much, but some of the most generous federal programs have actually taken major hits the past 2 years. Pell grants and Perkins Loans, which are targeted at the lowest-income students, have actually been declining since 2005. The most recent student loan legislation will help reverse some of these trends, though, by providing significant increases in Pell grant funding over the next 5 years.

Private student loan debt is still going to be a reality for most college-bound students and their parents (unless you attend one of the handful of schools moving toward no-loan aid packages).

How to Minimize Private Loan Debt

1. Recognize that not all loans are created equal
You want to make sure you take advantage of all the federal and state loan programs before you venture into the world of private student loans. These government-sponsored programs almost always offer better interest rates and more favorable terms than private lenders. For Perkins and subsidized Stafford loans, the government covers the interest payments while you're in school, which can make a big difference.

Learn more about the effects of interest and capitalization on your monthly loan payments using our Loan Capitalization Calculator.

2. Exhaust other financing options
Make sure that you take advantage of all the other financing opportunities out there. Don't forget to do a scholarship search to uncover relevant awards. You might also want to consider a part-time job while you're in school to help reduce your private student loan burden.

3. Create a realistic budget and stick to it
We know that you want to have fun while you're in school, but make sure your spending isn't getting out of hand. While a private lender will let you take out a student loan to help cover tuition and additional college-related expenses, remember that you're going to have to pay this money back down the road... with interest. You should consider ways that you can lower your expenses. For example, living on campus may be an option worth considering since you will likely only pay 9 months of rent (vs. committing to a 12-month lease for an off-campus apartment).

4. Be an educated consumer
Don't just go with the private lender that sends you the best brochure. Take the time to see what options are available to you. We offer a free tool to help you compare student loans. Some lenders will tell you about all the great borrower benefits that they have. Take a step back, read the fine print, and ask questions. Sure, a private lender may offer an interest rate reduction after 36 on-time payments, but find out what percentage of borrowers actually make that many on-time payments. What happens if you miss a payment or two? What are the origination and application fees? What happens if you need a deferment?

While we hope you are able to finance your education without private loans, your education is an investment in your future and it may be necessary to take out private student loans as part of this investment. Keep in mind that private student loans are not free money. Make sure you are responsible and do your homework.

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