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Study the private loan carefully before you leap .......Anne Tergesen
FAMILIES often turn to private loans to bridge the gap between the cost of college and the maximum $5,500 a year undergraduates can borrow in federally-backed student loans. But the credit crunch means those seeking private loans for the coming academic year are likely to encounter problems, from higher interest rates to lenders that baulk at making loans to anyone but the most creditworthy.
“It’s more important than ever for families to plan in advance,” says Kevin Walker, CEO of Simple Tuition, which runs a website that lets borrowers compare offerings from lenders that pay it for placement. What’s a good strategy? Before deciding to take out a private loan, carefully consider the alternatives. With variable rates now ranging from 6% to 16% and fees as high as 11.5%, private student loans are typically more expensive than federallybacked Stafford Loans for students. These carry a maximum fixed interest rate of 6.8% while PLUS Loans for parents charge 8.5%. Stafford Loans limit undergraduate borrowing to $3,500 for freshman year, $4,500 for sophomore year, and $5,500 annually thereafter, but PLUS loans allow parents to borrow up to the full cost of attendance. Some states also offer bargain-rate loans to those who attend college within their borders. “Private loans should be a last resort,” says Kalman Chany, author of Paying for College Without Going Broke. Still, many families gravitate to private loans, in part because they leave the student, not the parent, on the hook for repayment. Moreover, those unable to qualify for federal loans, including foreign students and those with grade point averages below 2.0, may have no choice but to use private loans, says Mark Kantrowitz, publisher of financial aid website FinAid.org. When loan shopping, don’t simply pick the lender advertising the lowest rate. Because interest rates depend mainly on a borrower’s credit score, the percentage an individual pays may well be higher. Even students with relatively sound credit typically come out ahead by asking a relative or a friend with a more established credit history to cosign a loan’s promissory note. Co-signers are responsible for repayment should the student default. The writer is an associate editor for BusinessWeek |
