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Some critics say these methods go too far. One site, StudentLoanJustice.org, includes testimonials from families who say borrowers committed suicide after being hounded by collectors over student loans they couldn't pay. The site's founder, Alan Collinge, watched interest balloon his student-loan debt from $38,000 to more than $100,000 after he couldn't find work in his field. He believes the student-loan system has been "hijacked" by for-profit companies.
Indeed, from a broken system that in the 1980s suffered massive defaults, student loans have grown into an extremely profitable business. The queen of the moneymakers is Sallie Mae, with more than $1 billion in net income last year and an enviable 30% return on equity. The company, once a quasi-government agency, is in negotiations to be taken over by a private-equity fund.
Other lenders, including Bank of America, Citibank and JPMorgan Chase, have developed profitable student-loan businesses. When these companies make federal student loans, the government guarantees to repay them 96 to 98 cents on the dollar if the borrower defaults. When they make private loans, these lenders charge variable rates that can soar as high as 19% (compared with a fixed 6.8% for federal Stafford loans).
The rates and terms of these private loans often aren't disclosed before a student submits an application, said Mark Kantrowitz of FinAid.org, making it tough for borrowers to comparison shop.
But the profits are becoming a bit less rich. In September, Congress passed the College Cost Reduction and Access Act of 2007, which reduces lender subsidies, increases grant aid to needy students and those who plan to teach, and curbs the amounts students are forced to repay. See "College students get a break on costs."
Lenders and other critics say students will suffer for these reforms -- that lower potential profits will drive some smaller lenders from the market, resulting in less competition and innovation.
Which means, essentially, that student lenders are arguing the benefits of free markets even though much of their business relies on government guarantees and special help.
The Congressional changes don't absolve students and parents of the need to set their own limits on borrowing, as I discussed in "How much college debt is too much?" Too many families are buying more college education than they can afford, with repercussions that can last the students' lifetimes.
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That's why it's important to keep the following in mind when borrowing for college:
Don't borrow more in total than you expect to make your first year on the job. This rule of thumb isn't ironclad; if you're borrowing to become a doctor or lawyer, you may face a few low-earning years at the beginning of your career. But for most students, this rule will contain the cost of your debt to something you can actually afford to repay. (If you're not sure what your future career might pay, you can visit the U.S. Bureau of Labor Statistics for estimates.)
Don't borrow unless you're sure you'll stay the course. A degree won't pay off if you never actually get it. If you don't have a clear sense of what you want to do, consider a few semesters at a community college to winnow your choices while keeping costs down.
Exhaust federal student loans first. You won't find cheaper or more flexible debt than federal loans. You also should submit a Free Application for Federal Student Aid (FAFSA) each year to see if you qualify for any grants, scholarships or other help.
Consider federal PLUS loans. This federal loan program is designed for parents who want to help their kids pay for school, hence the name: Parent Loan for Undergraduate Students. This debt is typically somewhat more expensive than federal student loans, but still cheaper than most private loans.
Apply for private loans with caution. You'll get the best rates if you or a co-signer has good credit scores. Pay attention to any fees, since they can significantly increase the cost of a loan. Check out the information and rate chart at FinAid.org for details on popular loan programs.
Updated Sept. 28, 2007
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