The Project on Student Debt recently reported that the percentage of undergraduate college students who took out private (non-federal) student loans shot up from 5% in 2003-2004 to 14% in 2007-2008. This large increase attracted the attention of student advocates because private student loans typically have much higher interest rates and less favorable borrower terms than federal student loans.

Federal student loans include Perkins loans, subsidized and unsubsidized Stafford loans, and PLUS loans for parents and graduate students. Private student loans are loans offered by banks, financial institutions, and companies that specialize in student loans, such as the Student Loan Marketing Association (SLM, or “Sallie Mae”).

There are a number of myths that persist when it comes to understanding private student loans vs. federal loans, including federal loan eligibility. While it’s true that federal Perkins loans and subsidized Stafford loans are income-restricted, unsubsidized Stafford loans are not: almost all students – and certainly far more than the number of students who apply for them – are eligible for unsubsidized Stafford loans.

Also, there is plenty of federal funding to go around. In the 2007-2008 school year, the U.S. Department of Education provided nearly 10 million students with approximately $100 billion in federal financial aid, and with the dollars the Obama administration has just added to the education budget, that funding is likely to be the same again, or higher, this year. It’s not yet clear how much private funding will be available for private student loans, with financial institutions still working on recovering from the 2007-2008 credit crisis.

A low, fixed interest rate is one of the primary advantages of federal student loans in the private student loans vs. federal loans debate. A fixed interest rate is one that stays the same for the life of the loan, regardless of how banking interest rates may fluctuate. Currently, the interest rates on new subsidized Stafford loans is 6.0%; on new unsubsidized Stafford loans, 6.8%; on Perkins loans, 5.0%; and on PLUS loans for both grad students and parents, either 7.9% for a loan taken out through the Direct Lending program or 8.5% for a loan taken out through the FFEL program.

In contrast, the current interest rate of the average private loan is about 12%, according to Mark Kantrowitz, publisher of FinAid.org, who was quoted in a Forbes.com article dated April 22, 2009. Additionally, most private student loans have a variable interest rate, not a fixed rate. A variable interest rate is one that may not stay the same for the life of the loan: your private loan’s interest rate may go down, but it may also go up.

One likely reason why the percentage of college students taking out private student loans has increased is the huge increase in tuition at most colleges. Sometimes, depending on the school you want to attend, a private loan may be unavoidable to cover the gap between the true cost of attendance and what federal student financial aid will cover. In this case, college financial aid advocates remind students of two old and well-known pieces of advice: shop around and read the fine print.

But advocates also urge students to fill out the FAFSA and take maximum advantage of federal student loans before signing the dotted line on any private student loan. Go after federal, state, and private scholarships, too. It may be that a Pell Grant (which you’ll get automatically if your FAFSA qualifies you for one) and scholarships from multiple sources will help you bridge the college cost gap without need of a private loan.

The adult learner, or nontraditional learner, is today’s primary college student. More than 40% of 21st-century college students are 25 years of age or older, and approximately 13% are single parents. Most need financial aid to cover education costs. If you’ve always thought college scholarships were only for high school seniors, you’ll be glad to know there are adult learning scholarships to help nontraditional learners return to school. Here are some tips on where to look for them.

Federal aid first
Fill out the FAFSA immediately. Federal financial aid is determined by family income, not by age. The amount of federal aid you can get depends on whether you’re a full-, half-, or part-time student, but as long as you’re working toward an accredited degree or certificate/diploma, there is no age restriction on federal financial aid.

Federal adult learning scholarships include Pell Grants, the FSEOG, the Work-Study program, and TEACH Grants. Congress just increased maximum Pell Grants to $5,350 in 2009 and $5,550 in 2010. The number of Pell Grants was also increased by 800,000 grants. Your FAFSA is your Pell Grant application. If your income qualifies you for a Pell Grant, you’ll automatically get one.

The FAFSA is also used by individual states to determine your eligibility for state-sponsored adult learning scholarships and grants. With the 2009 economic stimulus bill funds they received, many states are working with their community colleges to provide new career education and retraining programs as quickly as possible.

Your school’s scholarships
If you’re already enrolled, or thinking of enrolling, in a school, talk to a financial aid counselor there. Many adult learning scholarships and grants are provided by individual colleges and universities to help nontraditional students begin or stay in school.

Also ask whether your school has an Alpha Sigma Lambda Chapter. Alpha Sigma Lambda is the national honor society for nontraditional adult students, which offers a number of adult learning scholarships and grants.

If your school doesn’t have any adult learning scholarships appropriate for you, they may be able to provide you with the names of alumni associations and local organizations or foundations that do.

Your employer or HR department: tuition reimbursement
Your employer may not seem like an obvious scholarship source, but many companies offer benefits that employees never hear about. Even small businesses sometimes offer tuition reimbursement for higher education, advanced training, and retraining programs that increase the value of your contribution to the company, and employers associated with large national industries may have access to adult learning scholarships through trade organizations.

Your union or professional association’s scholarships
If you belong to a union, professional association, or trade association, contact your local representative and ask if the group provides any adult learning scholarships and grants. A good example is the Union Plus Scholarship Program, which has awarded more than $2 million in scholarships to labor union members and their families. Another example is the Two Ten Footwear Foundation, which provides college scholarships to students affiliated with the footwear, leather, or allied industries.

National organizations and foundations
Many national organizations, philanthropic societies, charitable foundations, and private companies are sources of adult learning scholarships and grants. For example, the retail clothing store Talbot’s awards 55 scholarships per year to women who are returning to school to complete their first undergraduate degree and Coca-Cola provides 150 adult learning scholarships a year for students enrolled in community college.

Your local Chamber of Commerce may also know of local or national scholarships.

Student loan debt is a serious concern for students all over the country, as has been proven by the incredible response to a group created on Facebook by a law school graduate (who is $80,000 in debt), called “Cancel Student Loan Debt to Stimulate the Economy.” Under certain circumstances, the federal government will cancel the debt from all or part of an education loan. This is the process of student loan forgiveness. Considering the troubled economy plus a growing number of students who, after graduating, cannot afford their monthly payments on their modest salaries, it is no wonder this group got the frenzy of attention it did.   

The Little Facebook Group That Could

Robert Appelbaum created the “Cancel Student Loan Debt to Stimulate the Economy” Facebook group in response to the recurring news about business executives being bailed out by the government and using the money for bonuses and other luxuries. Rather than complain to his friends, he created the Facebook group only to find, to his surprise, that in a relatively short period of time, over 100,000 people joined. Not only did they click a button – which is all it takes to be a member of one of the thousands of Facebook groups out there – but they were taking action, calling for Congress to take legislative action towards student loan forgiveness.

Buried in Debt: Students Struggle 

Robert found that his story – whereby the modest salary of $36,000 a year that he made right out of law school was not enough to keep up with his monthly payments towards his $80,000 student loan and caused him to go into forbearance for 5 years – was far from unusual.  Ultimately, he ended up with a total loan amount of $100,000, sometimes making him regret getting an education in the first place.

All over the country, there are similar stories since so many students seeking a higher education cannot afford it without taking out either federal and/or private student loans. According to the Project on Student Debt, the average debs of students graduating with loans rose from $18,796 in 2006 to $20,098 in 2007. FinAid.org reports that in 2008 there were nearly $131 billion in outstanding private loans and $544 billion in outstanding federal loans.

Students Look for Help

This growing Facebook group is looking for help with their overwhelming monthly payments, restrictive repayment plans and that they may eventually have their loan forgiven.

Promising Plans for Federal Loan Borrowers 

Some plans are being established for federal loan borrowers including the Income-Based Repayment Plan and the Public Service Loan Forgiveness Plan. Both plans promise to make adjustments on monthly payments based on the borrowers income and loan forgiveness after an allotted period of time. Other plans include the Income-Contingent Repayment Plan for Direct Loan holders and Income-Sensitive Repayment Plan for FFEL Loan holders, also impacting the monthly payments and ultimate forgiveness of the loans.

Room for Growth for Private Loan Legislation Change

Private loan borrowers have less promising chances for student loan forgiveness, but there are those that are fighting for changes to legislation preventing private student loans from being forgiven as bankruptcy cases.

With the economy in the trouble it is in, and the student loan laws overwhelming so many Americans, there is no better time than the present to join forces and call for change. And Facebook is an excellent place to rally the groups.

Sources:  ”Asking for Student Loan Forgiveness”, BusinessWeek.com, ”Difficulty Repaying”, Student Aid on the Web, Project on Student Debt

If your student loans are part of the debt causing you stress during the recession, you may be glad to know there are loan options that can help you with postponing your student loan payments until you are financially back on your feet.

Job lay-offs, unemployment, and the mortgage and credit crisis are all examples of economic hardship that can qualify for postponing student loan payments. There are two postponement solutions, loan deferment and loan forbearance. There are some differences between the two programs, but both allow you to postpone or reduce your student loan payments while you are job-hunting.

With a deferment, your loan is temporarily frozen. You don’t need to make any payments and no interest accumulates (accrues), except on unsubsidized federal Stafford loans. If you qualify for the deferment program, the government will pay the interest that accumulates on any subsidized federal student loans you have. You must continue paying the interest on unsubsidized loans, however.

Another benefit of a loan deferment is that it has no effect on your credit score. Your credit is still in good standing, even though you are postponing your student loan payments.

If you’re not eligible for a deferment, you may qualify for another kind of loan payment postponement called a forbearance. Postponing your student loan payments with a forbearance also allows you to temporarily reduce your student loan debt, but you’ll still have to pay the interest that accumulates—even on a subsidized federal loan. Any accrued interest you don’t pay off during your forbearance period gets added to the balance of the loan, so if you can’t keep up with the required interest payments, you may end up owing a lot more than you intended when the forbearance expires and you return to making regular loan payments.

Nevertheless, if you are financially strained, forbearance can help you avoid defaulting on your loan, which helps you to maintain a good credit rating.

Check directly with your lender to see if you qualify for a student loan deferment or forbearance. With the Obama administration putting pressure on banks to meet customers’ needs in these difficult economic times, most lenders may look for new ways to help you with postponing your student loan payments.