Image: Graduation cap © Stephen Wisbauer, Getty Images

Instead of saving up for their sons' college education, Bill Dunham and his wife are taking out loans for high school. Their eldest son will begin ninth grade at a school in Boston where annual tuition runs around $10,000 -- and they already pay $5,000 a year for their younger child. A project manager for a mechanical construction company, Dunham says the schools referred him to lenders who specialize in pre-college education loans. He's taking a loan to cover his son's full high school tuition, which he plans to repay over two years. "If we had the money, we'd pay it now," he says.

It used to be that families first signed up for education loans when their children enrolled in college, but a growing number of parents are seeking tuition assistance as soon as kindergarten. Though data are scarce, private-school experts and the small number of lenders who provide loans for kindergarten through 12th grade say pre-college loans are becoming more popular. Your Tuition Solution, one of the largest lenders in this space, says demand for the upcoming year is already up. This month, the total dollar amount of loans families requested rose 10% compared with a year ago; at that pace, the company expects its total funding to rise to $20 million for 2012-13. Separately, First Marblehead, which exited the market in 2008, re-entered last year as demand for loans began to rise.

Much of this demand is coming from high-income families. Roughly 20% of families that applied for aid to pay for their children's kindergarten through 12th grade private school education had incomes of $150,000 or more, according to 2010-11 data, the latest from the National Association of Independent Schools. That's up from just 6% in 2002-03. Those who don't get approved for free aid, like grants, increasingly turn to loans, experts say.

For parents who sign up for pre-college loans, the risks can be significant. To begin with, they could be repaying the loans for a long time. Sallie Mae's and Your Tuition Solution's pre-college loans have repayment periods of up to three and seven years, respectively. Loans at the Hawken School in Chesterland, Ohio, don't have to be repaid until after the child graduates college. That means parents could be on the hook to repay K-12 and college loans simultaneously. Already, about one in six parents of college graduates have loans, and they're projected to owe nearly $34,000 on average this year, according to FinAid.org. Taking on loans before college leaves parents at risk of owing larger debts, experts say.

Schools are offering their own financing options as well. The Blake School in Hopkins, Minn., says 132 of its families signed up for its 10-month payment plan this year -- which charges an 8.5% fixed rate -- up 19% from the previous academic year. The Hawken School says it provides a small number of loans with a 6% rate. "These loans aren't as taboo as they once were -- there are a lot more schools that are much more willing now to present a loan program as an affordability option," says Kristen Power, the northeast regional director for the NAIS' School and Student Services, which processes families' financial aid applications to private schools.

The rise in private school loans coincides with a rise in tuition. The average cost of private school is nearly $22,000 a year, up 4% from a year ago and up 26% from 2006-07, according to the NAIS. While schools increased their financial aid budgets, the gap between free aid and tuition costs is getting bigger for many parents. As a result, enrollment is dropping as fewer families can afford to pay. Total private school enrollment is projected at around 5.3 million this year, down 11% from 2007, according to the Department of Education.

The loans can also be expensive. The interest rates -- which can be fixed or variable -- range from around 4% to roughly 20%. (Lower rates are given to parents with higher credit scores.) And the loans can be large: The average loan given by Your Tuition Solution is $14,000. First Marblehead loans out up to $30,000 a year. At the Lake Trust Credit Union that's headquartered in Lansing, Mich., borrowers can have up to $40,000 outstanding in so-called K-12 education loans.

For those parents who are set on giving their children a private education, the hunt for an alternative way to fill the gap has intensified, says Brian Fisher, a partner at AdmissionsQuest, which provides consulting to families whose children attend private boarding schools. In most cases, parents are informed of these loans from the schools' admissions and financial aid offices, says Power.

The schools say they provide parents information on the loans but don't go out of their way to encourage the practice. Jose Baltier of Midland, Texas, says he was stumped about how to pay for his son's education at a selective boarding school in Massachusetts until he received the school's acceptance package, which included a brochure for the lender Your Tuition Solution. He says he contacted the company and a day later was approved for a loan.

To be sure, lenders say the loans are less risky than they were before the recession. Qualifying is harder and in most cases is restricted to borrowers in good credit standing and who submit income documentation. The repayment periods -- which previously stretched up to 20 years -- are shorter now, and the loan sizes lenders provide are smaller, says Power. Lenders also say they encourage parents who sign up for their loans to choose the shortest repayment period possible and to explore more affordable alternatives, like a tuition payment plan that allows parents to split up tuition costs typically over 10 months and doesn't charge interest.

Despite the risks, experts say many parents are intent on making private education a reality for their children no matter the cost. Robin Aronow, an independent educational consultant to families in New York City, says parents believe that private schools will give their children a higher quality of education and will help them get into a better college, which is why they're willing to stretch.

That's the case for Dunham, who says he and his wife haven't saved for college for their two children. Instead, he says, they're trying to give them the best education now in the hopes that it'll open doors to better colleges. "We'll figure out how to pay for it then, or with any luck they'll get scholarships," he says. "Right or wrong, we're hoping our experiment works."

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