A Better Source for Low-Interest College Loans May Be Just Around the Corner

Money for college
Money for college

Money to pay for a college education can be hard to come by. Saving in this economy is a challenge. Scholarships are competitive. And student loans often won't provide you with enough money to cover both tuition and all the other associated costs.

But some community-based groups are seeking to fill the affordable college financing gap. As a recent MarketWatch article discussed, these local lending groups are playing an increasingly important role in getting many students to college.

Comparing Loans

There are wide differences between types of student loans. On one hand, federal loans typically offer reasonable rates and generous terms, including loan deferment and forbearance under certain conditions. Yet many people need more money than those federal loans can provide, so they turn to private lenders. Their loans can carry much higher rates, making longer repayment periods necessary and thus postponing the day students and their families can get them paid off.

The loans offered by these hundreds of community-based groups fall somewhere in between. Using locally generated donations, these groups put together funds that offer loans to graduating high school seniors from their local schools.

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Typically, the interest rates are comparable to what federal loans charge and therefore much more attractive than the average private loan rate. A few community groups even give out interest-free loans.

But community-group loans carry their own challenges. You can't expect the same flexibility in repayment terms and periods as federal loans offer, and they typically require parents to co-sign. Some also require collateral, up to and including parents' homes. As a result, defaulting on these loans can cause much more serious problems.

Moreover, because funding is limited by the generosity of local donors, students can't expect to receive huge amounts. Especially in a tough economy, donations can be hard to come by. And the community groups are also suffering from low returns on their investments.

Find Out More

To find out if your child may be eligible for a community-based loan, talk to your child's high school guidance counselor or principal. They should be able to get you pointed in the right direction if there's funding available.

Community-based loans won't solve all your problems. But when every dollar counts, even small loans could make a big difference.

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