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College loans aren’t created equally

MELVILLE, N.Y. — Just as parents and students are applying for college loans, the state attorney general’s office last month dropped a bombshell.

Some colleges are in cahoots with loan companies giving kickbacks to financial aid offices to get on the schools’ preferred lender lists, said New York Attorney General Andrew Cuomo. These lenders did not always offer the best deals to students.

So how do you go about getting the right college loan?

Experts say you begin by calling several lenders and comparing their offerings.

If your college has a preferred lender, call that one first “and then shop around,” said Tony Esposito, founder of Lerner & Esposito College Consultants in Commack, N.Y.

Before you sign up with a lender, you’ll need to know how the student loan industry works. There’s a big difference between federal loans and private loans.

Federal loans come in two main flavors: Stafford and PLUS, or Parent Loan for Undergraduate Students.

Stafford loans have borrowing limits of $3,500 for freshmen, $4,500 for sophomores and $5,500 for juniors and seniors. Families that demonstrate need can get subsidized Stafford loans, where the government pays the interest while you are in school. If you have unsubsidized loans, you can defer interest payments until after graduation.

Graduate students can receive up to $20,500 per year, but only $8,500 of that can be subsidized.

Stafford loans carry a fixed interest rate of 6.8 percent. Some lenders discount the rate for customers who allow monthly payments to be debited from their bank accounts and/or who have a history of on-time payments.

Under the PLUS loan program, parents can borrow as much money as they need to pay for costs not covered by their child’s financial aid package. A PLUS loan carries an interest rate of 8.5 percent, but parents can get a 7.9 percent rate if they go through the U.S. Department of Education’s Direct Loan program. Again, lenders offer various discount programs.

As of last July, graduate students also can borrow money under the PLUS program.

Federal loans also have some important advantages when it comes to paying back the money after graduation. They offer more flexible repayment plans, including ones contingent on income. And they carry protections, such as deferring payment if you lose your job or go back to school.

Private loans are a whole different animal, and they are the focus of Cuomo’s investigation. The number of students taking out private loans has surged, up an average of 28 percent per year in recent years, experts said.

“Students and parents are forced to turn to private student loans because of stagnant federal student loan limits and the rising cost of college,” said Mark Kantrowitz, founder of, which provides information on student loans.

Interest rates on private loans can range from 6 percent to 18 percent, depending on the family’s creditworthiness, said Robert Shireman, executive director of the Project on Student Debt, a policy and research organization based in Berkeley, Calif. Parents are often asked to co-sign the loan, and the rate will depend on either the student’s or the parents’ credit score, whichever is better. Many parents prefer private loans because the latter is solely the parents’ responsibility.

But parents should remember they are on the hook for private loans if they co-sign them.

Private lenders also offer various discounts, but they do not have the same guaranteed protections as federal loans if you run into repayment trouble after graduation.

One of Cuomo’s main concerns about the student loan industry is that the colleges don’t divulge their possible conflicts of interest when they recommend lenders. He is looking at financial-aid office practices at 60 public and private colleges nationwide.

Lenders, he asserts, will pay money to colleges based on a percentage of loans directed to the company. They also staff financial-aid call centers without indentifying themselves. And they pay for trips for financial-aid officers and for computer systems for the schools.

Last week, Cuomo announced a settlement with several universities, which said they won’t accept payments for steering students to specific lenders, and school employees won’t accept lenders’ gifts “of more than nominal value.” Also, the schools will reimburse students a total of $3.27 million for loans made under these arrangements over the past one to five years, depending on the school.

Some colleges also partner with lenders, putting the school’s name on what really is a private loan. If you are offered one of these, find out what lender is behind it and what the terms are.

Then, experts recommend, call one or two lenders from the list and one or two not on the list and compare the deals. But be aware that you may have to actually apply for the loan before the company will quote you a rate. And keep this in mind: Don’t apply at too many places, because inquiries can hurt your credit score.

When you talk to a sales representative, Esposito said, ask about the following: the interest rate, fees, discounts and deferment options.

And make sure the lenders know you are talking to several companies.

“If it looks like you are not shopping, they can give you a worse rate,” Shireman said.

Don’t automatically shy away from preferred lender lists, experts say, because some companies on the list may be offering good deals. And if you choose a lender that’s not on the list, make sure the school will provide the necessary paperwork to the company so you can secure the funds.