Private Student Loans: The Good, Bad and Ugly

Last Updated May 14, 2010 5:03 PM EDT

If you're contemplating getting a private student loan to pay for college, shop around.

The interest rates that lenders offer on private student loans are wildly different even for borrowers with the same credit scores.

Student Lending Analytics, which is an independent research and advisory firm, released the results of its private student loan comparisons this week that showed vastly different interest rates among sample lenders.

Here's the credit profile of the first of two fictional borrowers:

Borrower No. 1

  • FICO score: 700-720
  • Debt-Income Ratio: Low
Lending Results:
Lender Starting Interest Rate
  1. Addison Avenue Federal Credit Union 6.00%
  2. Citizens Bank 8.75%
  3. Wells Fargo Bank 10.24%
  4. Citibank 11.125% + 3% fee
  5. Sallie Mae 12.15% +3% fee

Borrower No. 2

  • FICO score: 790-810
  • Debt-Income ratio: Low
Lending Results:
Lender Starting Interest Rate
  1. SunTrust 4.25%
  2. Discover 4.25%
  3. Wells Fargo Bank 7.74%
  4. Sallie Mae 10.00% + 3% fee
  5. Citibank 10.125% + 3% fee
Student Lending Analytics obtained these quotes in late April, but rates change all the time. For instance, Sallie Mae has dropped its 3% fee and lowered its minimum and maximum interest rates.

What's clear is that you need to do a lot of comparison shopping before selecting a private student loan.

You should also max out federal student loans first, but plenty of families turn to private student loans because they want the onus of paying for college to be on their children. Remember, however, that private loans, unlike federal loans, only offer variable rates that have no interest rate caps. Sounds like financial dynamite to me.

Lynn O'Shaughnessy is the author of The College Solution and you can also find her at TheCollegeSolutionBlog. Follow her on Twitter.