As August is the peak month for student loan borrowing, it’s important for the Joe College blog to put some helpful information out there for those of you currently securing financing for the upcoming academic year.

There are some scary statistics from a recent article on projectonstudentdebt.org that points out “almost two-thirds (64%) of private loan borrowers in 2007- 08 borrowed less than they could have in Stafford loans, compared to less than half (48%) of private loan borrowers in 2003-04.” Why is this scary? It’s scary because the majority of private loans have a variable interest rate, which because they are tied to a financial index such as the Prime or LIBOR – which will undoubtedly increase over the life of the loan, mean higher and higher variable interest rates. According to Tim Ranzetta, CEO of Student Lending Analytics, the average starting interest rate on a private loan currently is 11%. The fixed rate on a federal subsidized Stafford loan is currently (through 7/1/2010) 5.6% while the federal unsubsidized Stafford loan has a fixed interest rate of 6.8%.

So, as you can see, the private student loans average interest is approximately 5% higher then the federal student loans available to all students. What this means is that 64% of private loan borrowers are passing on loans that will cost them less in the long run.

In order to receive federal student loans, the student and one parent must file the FAFSA form. Many families assume they aren’t eligible for any federal aid and do not file the form. They then take out a private loan as an alternative and are stuck with a loan with a higher interest rate. It’s important to point out that every student that files for financial aid through the FAFSA is eligible to receive, at a minimum, an unsubsidized federal Stafford loan. This federal loan may not pay for the cost of attendance but the federal loans should be maxxed out before ever signing up for a private loan. In addition to the lower fixed interest rates, there are also benefits such as deferments, forbearances, and income-based repayment schedules that you may not receive with a private loan.

To get an idea of how the differences in interest rates will affect monthly payments, visit NHHEAF's website and and use the college loan repayment calculator.

Funding with Federal First,

Rich

Statistics used in the report were gathered from the U.S. Department of Education’s National Postsecondary Student Aid Study, a survey conducted every four years.