With college costs continuing to rise, parents and students are increasingly turning to private lenders to cover the cost of tuition.

From 1995 to 2006, the amount of money borrowed from private lenders to pay for college rose from $1.3 billion to $17.3 billion, according to MSN Money columnist Liz Pulliam Weston. Why should this concern you? Because not all loans are created equal.

There are three basic types of loans available to undergrads: federal loans issued directly by the government; loans from private lenders subsidized and guaranteed by the government; and private loans.

The interest rates on federal loans are typically 6.25 percent to 8 percent; interest rates on private loans regularly run from 12 percent to 13 percent and can sometimes go as high as 28 percent, according to Alan Collinge, founder of StudentLoanJustice.org, a grass-roots organization dedicated to reforming predatory lending practices.

Private loans also offer less flexibility when it comes time to pay them back, Collinge warns. There are options available to borrowers who fall behind on federal loans, such as forbearances and graduated repayment plans. Some private lenders offer help for borrowers experiencing financial hardship as well, but they tend to be less forgiving.

It’s not uncommon for a lender to significantly jack up the interest rate on a loan when you miss payments, Collinge said. Furthermore, unlike credit-card debt, private student debt isn’t wiped out if you declare bankruptcy.

The lesson: Proceed with extreme caution. Collinge offers do’s and don’ts for borrowers considering private student loans:

Do

Tap all federal loans. Work closely with your school’s financial-aid office to ensure you’re taking advantage of all of the federal funds you have coming to you. According to a 2003 study by the Public Interest Research Group, 50 percent of borrowers take out private loans before tapping all of the federal loan money available.

Try to negotiate a better package with your school. “People don’t realize that, unless you’re going to a Top 30 school, there’s a good chance the school will be willing to revisit your financial-aid package,” Collinge said. If you’re unhappy with the mix of loans, grant and scholarship money being offered, go back to the bargaining table.

Consider all of your options. Before you take out private loans, exhaust every other option available, Collinge said. Be diligent about applying for scholarships, grants or other loans, including loans from family members.

Don’t

Stop with only the financial-aid office. While many private lenders that advertise directly to the consumer charge high fees and exorbitant interest rates, there are deals to be had outside the financial-aid office.

If you decide to take out private loans for schools, avoid having parents co-sign. “Oftentimes, co-signers’ houses and retirement packages end up as a part of the collateral on these loans,” Collinge said. This means if you fall behind, your parents may pay the price.

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This entry was posted on Sunday, October 14th, 2007 at 10:16 pm and is filed under Education, Student Loan. Tags: College, Grant, Loans, Scholarship, Student, Student Loan, Study. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.