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Inflexible lenders, limited repayment options and high rates have made private student loans a poor choice for many borrowers.

Now, however, people who have exhausted available federal student loans -- or those who already have private loans, and want to refinance -- may have better options.

A small but growing network of member-owned credit unions offers variable rates as low as 3.29% on a new, 10-year private student loan and 4.75% for a 15-year consolidation loan, said Ken O'Connor, director of student advocacy at cuStudentLoans.org.

Similar rates on new student loans are available from independent community banks through the iHelp online portal. Fixed rates of 6% to 7.85% are available on consolidation loans.

That compares to rates of 8.5% to 13.3% for consolidation loans at Wells Fargo, for example. Variable private student loan rates typically range from 3% to 19%, with an average rate of 7.8%, according to the Consumer Financial Protection Bureau.

Image: Liz Weston

Liz Weston

The loans offered by cuStudentLoans.org and iHelp still typically require co-signers, as do most other private student loans. But the co-signer on the credit union student loans can be "released" or taken off the loan after as few as 24 on-time monthly payments for new loans, or 12 payments on consolidation loans.

So far, sounds like good news. The bad news is that you may not qualify, and if you do, these loans still might not be your best choice:

  • Unlike federal student loans, private loans -- including these -- have underwriting standards that take into account credit history, income and debt-to-income ratios of both the borrower and the co-signer. Those standards may make you ineligible or cause you to pay a higher rate.
  • Both cuStudentLoans.org and iHelp have lists of eligible schools that qualify for loans. If you attended a for-profit school with a high default rate, you likely won't find it on their lists. Consolidation loans at iHelp are further limited to eligible schools in just nine states: Delaware, Illinois, Maryland, New Jersey, New York, Ohio, Pennsylvania, Virginia and West Virginia.
  • Private loans still lack many of the consumer protections that should make federal student loans the first choice for most borrowers, said Lynn O'Shaughnessy, author of "The College Solution" book and website.

Federal student loans, for example, have income-based repayment programs that can dramatically reduce monthly costs for people with high debts and low incomes. (You can read more about the differences between federal and private loans in my story on "The growing student loan crisis.") Plus, federal loans offer the possibility of forgiveness after 10 years of payments for those in government service jobs and after 25 years for all other workers.

"That's the safety net if you wind up unemployed and back living in your parents' basement," O'Shaughnessy said.

But federal student loan borrowing limits haven't increased much even as college costs have soared. Most undergraduates can''t borrow more than $27,000 in federal student loans. The average sticker price for a single year at a public university, including room and board, is now over $22,000.

Students and their parents turned to private student loans to fill the gap. The private student loan market soared from less than $5 billion in 2001 to over $20 billion in 2008. The financial crisis, credit crunch and lending reforms shrank the market to less than $6 billion in 2011. The Consumer Financial Protection Bureau estimates Americans now owe more than $150 billion in private student loans, and CFPB director Richard Cordray recently decried the lack of refinancing options for those loans, according to the New York Times.

Payments that aren't affordable now may be even less so in the future. Most of these private loans have variable rates, which could spike higher, given today's record-low rate environment. Plus, private lenders have been notoriously less willing to work with troubled borrowers than the federal government.

That's why O''Shaughnessy recommends people consider private student loans only if they have excellent credit (so they can get the best rates) and the financial capacity to pay the loans off quickly -- ideally within a few years of graduation. She also recommends shopping around for the best deal, using websites such as AllTuition, which compares private college loans.

 "People should run those student loan repayment calculators so they get an idea of what they're getting into," O'Shaughnessy said. "Borrowing $10,000 (the first year) might not seem like a lot until you realize you're going to have to borrow at least that much all the other years. That's going to add up."

Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.

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