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The Loan Without the Regret

For students who must borrow, federal reform and a brightening economy are silver linings.

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Lauren Hoover, a 2009 graduate of Indiana University, can afford to whittle down her loan ahead of schedule.

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Several Web entrepreneurs promise to help students find inexpensive private loans. OvertureMarketplace.com, SimpleTuition.com, Studentchoice.org, Studentlendinganalytics.com, TuitionU.com, and cuStudentLoans.org all pledge fast Web searches for loans. And new peer-to-peer websites such as People2capital.com and Prosper.com offer lists of private investors willing to lend tuition money.

Recent reforms of federal laws protecting borrowers can also help students make the right choices in their loan hunts. Consumer protection laws that took effect in February bar banks and other private lenders from luring potential borrowers with promises of unrealistically low monthly payments. Now, lenders must warn loan applicants up front of their maximum potential monthly payments. In addition, banks must give applicants up to 30 days to consider a loan offer and three days to return the money and cancel a loan. 

Easier to repay. The federal government appears to be working out the kinks in the income-based repayment, or IBR, plan it launched in 2009. Borrowers who tried to sign up for it shortly after its launch complained of confusing instructions, incorrect bills, and red tape, says Heather Jarvis, a senior program manager for the nonprofit Equal Justice Works and an expert on student debt. Government contractors handling calls and applications sometimes improperly steered applicants to a sound-alike program called income-contingent repayment, which generally isn't as good a deal for borrowers, she says.

Applicants still have to be vigilant, but "there has been a lot of improvement recently in processing" applications, she says. Borrowers who consolidate their federal student loans with the government can sign up for income-based repayment and cap payments at 15 percent of discretionary income. People in public service jobs who make 10 years' worth of payments on time can have the remainder of their loans forgiven. Anyone who makes 25 years' worth of payments on time can have the rest of the loans forgiven, no matter what kind of job they hold. And those who take out loans after 2014 will find it even easier to repay, as the maximum monthly IBR payment is slated to drop to 10 percent of a borrower's discretionary income. 

Private lenders have also started easing tough repayment requirements. During the credit crunch, many private lenders required parents to begin repayments immediately, instead of waiting until the student left college. But some credit unions are now letting parents defer payments again. And Sallie Mae says it will allow parents to make token payments of as little as $25 a month (though it may charge higher interest on those loans). In addition, Sallie Mae has cut the amount of time before cosigners can apply for release from repayment responsibility to 12 on-time payments from 24. Of course, the company will approve parental relief only if a student has developed a good credit score. Many other lenders allow parents to apply for release after 24 payments. 

The changes have been a boon to the entire Hoover family. Lauren, who now markets and manages wellness programs for corporations, can afford to whittle down her loan ahead of schedule. Meanwhile, her younger brother is borrowing only from their mom's credit union for the extra cash he needs to attend Ball State University in Muncie, Ind. Clearly, big sister says, he "learned from my mistake." 

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