Private lenders: The credit crunch has wiped out most of the private, alternative (also sometimes called "signature") educational loans. But students who can find a U.S. citizen with good credit (a FICO score of at least 700 is generally required) to guarantee payments can usually find a bank willing to lend them at least a little money. Financial experts suggest private loans be considered only as a last-ditch alternative, however, as they can be onerous. "It used to be that anyone with a pulse could get a loan," says Greg McBride, an analyst for Bankrate.com. "Now you've got to jump through more hoops than a circus act."
Some private loans, such as Sallie Mae's new "Smart Option," require payments to start almost immediately—while the student is in school.
Private loans can also be expensive. A few nonprofits, such as the Rhode Island Student Loan Authority, are offering fixed rates below 8 percent. But most for-profit lenders were offering only variable rates in late spring 2009. Their rates ranged from a tick below prime (which was about 3 percent) to 14 percentage points above the London interbank rate (Libor), which was hovering around 1 percent. Those with good credit will very likely be offered cheap-sounding rates as low as 4 percent, but "the rates will only go up from here," warns Tim Ranzetta, president of Student Lending Analytics. "When the economy gets back on its feet, the rates could be 3 to 4 percent higher than they are today," which could ratchet payments up by hundreds of dollars a year, Ranzetta says.
Ranzetta warns that shopping for an affordable private loan smartly requires a lot of work in a short time. Lenders typically don't reveal the rate they'll charge you until you've completed a lengthy application, so smart shoppers have to fill out several applications. Credit rating agencies will allow borrowers only 30 days of shopping for a loan before dinging credit scores, he says. And borrowers concerned about their jobs would be wise to read the fine print in each loan document about the fees for deferring payments if they get into financial trouble, Ranzetta advises. Bankruptcy courts generally refuse to discharge educational debts (unlike, say, credit card debts), so borrowers have little choice but to pay all interest and fees on educational debts.
As troublesome and expensive as private loans are, however, they are not the most expensive way to raise cash for college, says Bankrate's McBride. Many credit cards actually charge more than private loans. And cashing out a retirement account can be even more expensive because of tax penalties.
If it's the only way to make it through college, borrowing a few thousand dollars a year at a reasonable interest rate is generally rated a good investment. After all, the typical college graduate grossed almost $4,000 a month last year. Those who didn't go to college earned about $2,400. That difference of $1,600 a month won't make up for really big debts, though, and isn't guaranteed. Some college graduates, especially those entering the job market during the current recession, might have to get by on less and thus won't have much extra to divert to loan payments.