Students wisely turn from private loans

I can't stand debt, and one of my missions in life is keeping people from borrowing beyond their means.

So I take it as good news that private student loans are declining fast. According to a new report from the College Board, the amount of nonfederal education loans in 2008-2009 dropped by almost 50 percent from the previous school year and fell to 13 percent of the market from 25 percent a year earlier.

SLM Corp., commonly known as Sallie Mae, recently reported a significant drop in its private lending. In its third-quarter results, Sallie Mae, the nation's largest student lender, said it had originated $893 million in private education loans, down from $2.1 billion for the same quarter a year ago.

The reason for this trend is obvious. The terrible recession has broken a long-standing trend toward private loans, which generally carry higher interest rates than federally subsidized or unsubsidized loans.

Additionally, borrowers don't get the same protections or perks. For example, the government pays the interest on subsidized Stafford loans and Perkins loans while a student is in school.

Subsidized Stafford loans are awarded to students who have demonstrated financial need. Unsubsidized loans are awarded regardless of financial need and students are responsible for the interest, although they don't have to make payments while in school.

Clearly, of the two types of loans, subsidized is better, because with an unsubsidized loan, unpaid interest that accrued during the in-school period and the six-month grace period after leaving school is added to the loan principal.

"Students should always borrow federal first, as federal loans are cheaper," said Mark Kantrowitz, publisher of FinAid.org and FastWeb.com.

The interest rate on federally subsidized Stafford loans was 6 percent in 2008-2009. The rate dropped to 5.6 percent in 2009-2010 and is scheduled to decline to 3.4 percent in 2011-2012. The interest rate on unsubsidized Stafford loans is fixed at 6.8 percent.

Kantrowitz also points out that federal loans have better consumer protections, such as economic-hardship deferment, greater availability of forbearances and flexible repayment programs.

Interest rates for private student loans currently range from about 9.5 percent to 10 percent, down about one percentage point from the previous year, said Tim Ranzetta president of Student Lending Analytics, a California-based company that provides research and advisory services to college financial aid officers.

And these rates aren't fixed.