The Calculating Consumer: Student Loans

With the economy shedding close to 100,000 private sector jobs a month, waiting out the economic downturn in school may seem appealing.

But it's going to cost you: Student loans are becoming pricier and, in some cases, may be harder to get.

Government-backed student loans are probably the only unsecuritized personal loans that don't consider your credit rating. And a couple of years ago, they went from variable-rate to fixed-rate -- which means falling interest rates aren't going to directly benefit anyone who's taking out federal student loans.

Most graduate students will now pay 6.8% on their first $20,500 of yearly educational expenses and, with decent credit, can normally get 8.5% on anything more than that. Undergraduates -- especially those going to pricey private colleges -- will be more likely to have to turn to private loans for part of their student costs, where credit matters and interest rates may be variable.

But with the credit crunch, some lenders are cutting back and easing out of the student-loan business. CIT GroupCIT, which stopped originating private student loans late last year, has announced that it will become the latest lender to stop originating government-backed student loans.

Though the most common indices for private student loans -- Libor and the prime rate -- are falling, some lenders are increasing the maximum margin or the amount they add on to the index. Chase BankJPM now can add up to 9% on to Libor, up from 8% a year ago. CitibankC student loans can now charge 4.5% over the prime rate, compared with 4% a year ago, according to finaid.org.

The good news: Minimum margins on these loans decreased as well, so students with strong credit may be able to get lower rates than before. And in some cases, the most expensive loans are becoming less expensive -- student-loan giant Sallie Mae SLM is now charging only 6% over the prime rate for its most expensive loans, compared with 9.75% a year ago.

But it's more important than ever for students to keep an eye on their credit. There are five or six credit tiers between 650 or 850 that lenders map to interest rates, says Mark Kantrowitz, publisher of Finaid.org.

And a small interest-rate change can mean a huge change in interest payments over the life of a loan. A $50,000 30-year loan fixed at 7.3% will cost you more than $6,000 extra in interest payments than the same loan at 6.8%.

For variable-rate loans, all else equal Finaid.org recommends using one indexed to Libor rather than the prime rate, since the spread between the two has been growing. Libor, or the London Inter-Bank Offered Rate, is the rate at which London banks lend money to each other, set by the British Bankers Association.

Another way to make your loan cheaper is to simply take out less debt.

Sallie Mae's Web site advices students "Don't base your college choice on cost. There are options to make any school affordable." But keep in mind: it's in Sallie Mae's interest to keep you awash in debt. Any money you take out, you're paying back; even in bankruptcy it's virtually impossible to discharge student loans.

Sure, paying back crushing debt is helping future students get loans, but it's also helping Sallie Mae Principal Executive Officer Thomas Fitzpatrick keep annual compensation in excess of $16 million.

Sallie Mae says students looking to save money can consider studying at a two-year school before moving to a four-year school. And four years of college education can vary wildly: A private-college four-year education costs almost four times as much as a public-school four-year education.

To find out how much you can save with lower principal and interest payments, turn to BankingMyWay.com's mortgage calculator. (Just replace the word "mortgage" with the word "student loan" and use the calculator as usual. The math works the same.)