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By Adam Zoll | 10-11-2012 02:30 PM

Know the Trade-Offs of Government vs Private Student Loans

Parents and students should dig beyond interest rates to understand what kind of funding is right for their needs, says Collegian Financial Group's Peter Herman.

Adam Zoll: I'm Adam Zoll for Morningstar.

About two-thirds of today's college students graduate with loans, and mounting student debt has become not just an economic issue, but even a political one.

Here to talk about key considerations when taking out student loans is Peter Herman. Peter is president of Collegian Financial Group, a financial services firm in Northbrook, Ill., that specializes in college planning.

Peter, thanks for being here today.

Peter Herman: I'm happy to be here, Adam.

Zoll: Can you walk us through the preliminaries of the college loan process? When do you need to apply, and what are the steps to do so?

Herman: I have so many people that come to me, after their kids get accepted into college, and they're so happy that they finally made a choice. A lot times we get [a client call], we decided on XYZ college, and besides saying congratulations, we're looking at what is their net cost and how are they going to pay for it?

Now as you alluded to, two thirds of the people have college loans. The parents do not have any information, or the kids, because everything from the financial aid package that was awarded goes to the child. So we have to educate the parents to have the child forward it to them to open up, because they don't understand it, and then possibly forward it to a planner, if they're working with one.

So … loans are part of, unfortunately, the financial aid award, and that's a confusing thing to many people. If I'm getting financial aid or merit money, why are loans included in the award? I think they should be outside and separate, but I'm not going to change what has been historical for the last 20-30 years.

So they get offered loans at the time. The child gets offered what's called a Stafford Loan. The parent is offered a Parent PLUS Loan. They have a choice of not using that, but we'll talk about that in a second, or they are offered sources to go through for private loans, which are your typical banks in the area and your large banks that offer student loans.

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