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Private Loans: You Better Shop Around

If you've hit your $18,500 federal-loan limit and exhausted your scholarship opportunities, your last resort for financing business school is private loans. There's no dearth of lenders who cater to B-school students. According to Sallie Mae, the nation's largest provider of student loans, more than 450 banks, not-for-profit education groups, and schools give money to students with a good credit history. For lenders, B-school students are a top-notch investment. B-schoolers "have a 6% default rate," says Nicole Chestang, executive vice-president and secretary of the Graduate Management Admissions Council (GMAC). "It's the lowest default rate in graduate programs."

Although private loan money is plentiful, you have to pay extra for it -- interest as high as 9% a year. Fortunately, a new approach to private lending -- a collaboration between lenders and schools -- has cut the cost of education borrowing to some extent. And such programs are spreading. Only a few schools, including Wharton, Harvard, and Stanford, offer these financing options at the moment, but more are likely to sign on in the near future. Just remember this: Whatever funding source you use, make certain before applying that your credit is in good standing -- if necessary, by checking out your credit report. If you have questionable credit, banks will want you to get a creditworthy co-signer.

Private lenders collect extra money from you in various ways. For instance, the interest rate on federal loans is based on a 90-day treasury-bill rate and ranges from 6.32% to the federal cap at 8.25%. And that's that.

CREDIT CHECKS. For private loans, the interest rate is variable and is pegged either to the 90-day T-bill rate or the prime rate. And there are additional charges, such as guarantee fees, which secure the loan against default, and origination fees, which are often deducted from the loan proceeds to cover administration costs for processing the application. Private lender Access Group, for example, charges no fees at the disbursement of the loan, but applies a guarantee fee and supplemental fee at repayment. The guarantee fee is 6% for everyone, and then, based on your credit history, you're charged a supplemental fee, which is either an extra 1.5%, 3.9%, or 9.9%. The better your credit history, the lower your added supplemental fee. "The supplemental fee is based on the credit of the applicant, and we decide if we have to increase the fee," says Access Director of School Services Vivian Bowden. Access, however, doesn't charge an origination fee.

Other lenders also vary the charge according to the quality of your credit. For example, the GMAC's Tuition Loan Program creates a package based on your credit standing: excellent, good, or fair. If you have excellent credit, you pay the prime rate. If you only have fair credit, your options are unattractive: You'll be hit with a 4% origination fee, a spread of 1.5% over the prime rate, and, in some cases, a 3% repayment fee, depending on which school you attend. Most banks, however, cap the interest rate at 18.75%.

Which lender should you go with? There are a few primary choices, and the selection depends entirely on you. "We have information on all the lenders, and we let the student make the decision," says Debi Fidler, director of financial aid at the University of California at Berkeley's Haas school of business. Shop around a little, and you'll find any number of lenders that try to entice you with so-called reward programs. GMAC's Tuition Loan Program, for instance, offers a 0.25% interest-rate reduction if you repay your loan electronically, and throws in a 0.5% interest rate reduction if you make your first 48 payments on time.

MOST FAVORED LENDERS. Be aware that B-schools often have preferred lenders, with whom they've negotiated lower rates on behalf of their students. Schools have a close working relationship with their preferred lenders, which should result in superior service and a prompt disbursal of funds.

The University of Pennsylvania's Wharton School, for example, offers the Wharton/CitiAssist Loan Program, which requires

no credit review, no co-signer, and no origination fees. "Most private loan packages were unattractive in financing MBAs," says Sharon Brooks, Wharton's associate director of admissions and financial aid. "With the Wharton loan program, every student can borrow up to the student budget [$50,898 for 2000-01]. The approval rate is 100%." The interest rate -- currently the prime rate plus 0.5% -- is one of the lowest available. Harvard and Stanford offer similar programs. A recent trend, this type of loan is particularly advantageous for foreign students, who might otherwise be denied loans in the U.S.

Competition between private lenders will no doubt lead to even more innovative financing in the years ahead. So stay in touch with your school on what's available -- because picking the right plan could save you thousands of dollars. Jayant Mathew in New York

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