With credit drying up, where can you turn for student loans?

college financial aidPuzzles are often fun, but not this one: With credit scores plunging and loans in short supply, how do you go about paying for college these days?

It's a question you'd think might almost be easy for Scott Gamm. Granted, in many ways, he's just another high school kid, about to turn 18 and headed to college this fall (New York University's Stern School of Business). But in many ways, he isn't a typical high school kid: He's the founder of HelpSaveMyDollars.com, a personal finance website that he began in July, 2009.
"I've had an interest in finance since age 12," says Gamm, "and after my family experienced some financial problems, I realized how important it is to learn about money at a young age. Personal finance isn't taught in schools very much, and I felt I needed to provide this critical information in an easy-to-understand manner."

But even Gamm and his parents don't have a magic answer to that "how to pay for college" question and are scrambling to shore up loans to pay his tuition, which will be north of $50,000 per year.

In a perfect world, students would have a big, fat 529 to rely on, but it's not a perfect world. And even 529s have taken a hit these days. So what are people doing to fund a higher education? Here are three avenues to consider taking:

The smaller banks and community banks are where the action's been lately.

By all means, check out the loans and offerings at the bigger banks -- the last thing you want to do is ignore any possible source of revenue to pay for college. But community banks are jumping into the fray more often these days, and while you don't want to ignore the big banks, you sure don't want to drive past that little community bank in your neighborhood and assume it has nothing to offer.

Jennifer Sassman, director of financial aid at Wartburg College in Waverly, Iowa, has noticed that community banks generally have kinder terms than the bigger institutions. "It's becoming more widespread that the loans offered by larger banks are requiring interest payments while the student is still in school," Sassman observes. "Although this does help drive down the cost of the loan, it's not always a feasible option for students."

Another plus with going to a community bank is that many students can get a loan without being required to have a co-signer. With big banks, you'll almost definitely have to have a more well-heeled adult signing on the dotted line, too.

Not all the loan news coming out of community banks is good news, though. As Gamm explains, "These loans [from smaller institutions] are generally private loans with high interest rates that can be raised at any time, oftentimes without any notice."

Another negative, according to both Sassman and Gamm? Community banks often can't lend as much as the bigger banks.

Don't forget grants and scholarships. "I've been having success using websites such as FastWeb.com and Cappex.com for scholarships and grants, which are hard to get," says Gamm, "but they're a much better option than student loans, since grants don't have to be paid back, and there are no interest rates to worry about."

And a Sallie Mae study backs up Gamm's reasoning. Last year, Gallup conducted a survey for Sallie Mae called "How America Pays for College 2009," which was just released. They found that the number of American families nabbing grants and scholarships was greater than the number of students going after federal and private education loans.

Peer-to-peer student loan lending. If you read a lot of personal finance articles, you've probably heard about Prosper and some of the other lending sites that offer a way for you to get a loan from a peer. Regular investors can invest in someone else's goal of homeownership or business startup. People Capital takes that idea and makes it all about lending to students who want to go to college. If that concept appeals to you, it's worth checking out.

Geoff Williams is a frequent contributor to WalletPop. He is also the co-author of the new book Living Well with Bad Credit.

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