Students are relying more and more on private lenders to fund their college educations. Last year, private college loans totaled $17.3 billion and accounted for one out of every five dollars borrowed for college, according to the College Board. A decade ago, private lenders provided only 4 percent of college loan money.

Soaring college costs are driving the trend.

When Sharlyne Woodbury was accepted to Northeastern University, she scrambled to scrape together cash for tuition and fees. Government loans helped, but because they have borrowing caps, her financial aid adviser recommended supplementing federal aid with private loans.

Woodbury quickly agreed, signing the dotted line on a $19,000 deal.

Woodbury's case isn't unusual.

"The cost of attending college is increasing more rapidly than grant aid, federal loans and families' ability to pay," says Sandy Baum at the College Board. "Since those three components aren't growing as rapidly as college costs, there's a gap that's being filled by private loans."

But while private loans make higher education possible for many, they're triggering alarms, too.

Critics say lenders entice borrowers with slick advertising that's unclear and, at times, downright misleading. Financial aid officers also have come under fire for not guiding students away from trouble. Meanwhile, many students are saddled with private loan debts they can't afford.

Take Woodbury, 25, who borrowed $71,000 in three separate private loans. They now cost $530 a month to repay. Since that's too expensive, Woodbury recently spent $150 for a forbearance, which lets her suspend payments for up to six months.

"It's been a total nightmare," says Woodbury, who hustles two jobs as an office temp and coffee shop attendant. She hopes to land a better-paying gig in time to resume loan payments.

How to avoid such a scenario? To be sure, students should read carefully before signing the bottom line on any loan agreement. But knowing how to analyze deals and payment terms, asking the right questions, and being aware of all the financing options available for college can help, too.

Harsh words

Michael Dannenberg, director of education policy at the New America Foundation, has harsh words for such pitches.

"Advertising that suggests bypassing the federal loan system is reprehensible. You can get a much cheaper loan from the government," says Dannenberg. "But people are taking out private loans when they're eligible for federal aid."

Private lenders aren't unaware of such criticism. Larry Lutz, from First Marblehead, whose clients often apply for loans through the Alternative Student Loan Web site, says his company makes it clear to prospective borrowers that federal funding may be available, and even cheaper, to them.

"If you get to our application instructions, we specifically have language that says to that borrower, 'As you determine the best way to finance your education, you should consider the full range of financial options available to you. Private loans are typically used to supplement federal student loans when the latter are not sufficient to cover the full cost of education.'"

But in order to see this disclosure, students have to work their way down from the Alternative Student Loan Web site to the actual online application process.

Other lenders attract borrowers by noting that private loan money can be used for computers, failing to note that federal loan money also can be spent on technology.

Loan to Learn, offered by EduCap, informed potential borrowers that loan money could be used on college expenses including "those not covered by most federal aid (computers, books, transportation)."

That statement caught the attention of the United States Student Association, which in September filed a complaint with the Federal Trade Commission against Loan to Learn for using "false and deceptive advertising practices."

"We want to ensure the lending industry will provide students with affordable loans and not mislead them while doing it," says USSA President Jennifer Pae.

George Pappas, senior vice president of strategic partnerships at EduCap, says the company "categorically disagrees with the characterization of the (USSA) letter.

"We encourage students to avail themselves of any federal aid they can get," he says.

"We don't need to mischaracterize the products they can get. We know that at the end of day, based on the level of aid available and the schools they're going to, they will need our help. And we're here to give it to them."

Deciphering the ads and loan agreements

Whether it's due to murky advertising or other factors, "It's very clear students are taking out loans and they didn't realize what they were getting into," says Baum from the College Board.

Take Nick Keith. He borrowed $46,000 for cooking college, originally paying 9 percent on his loans. Pricey, but Keith assumed he'd lower the rate in the future when he established better credit. Meanwhile, he did quick computations and figured that at 9 percent, loans would cost $500 a month.

"I asked the financial aid adviser if it was $500 a month and she said, 'That sounds about right,'" says Keith. "Everything was fine until three months before graduation, when I got a letter saying my first payment would be due and it'd be $1,100. I nearly passed out."

Much to his surprise, Keith's interest rates had climbed, and now stand at just over 18 percent. That's partly because when he borrowed the money in 2004, the prime rate -- used to set his loan -- was at a low of 4.25 percent. Today it's 8.25 percent, which has driven up his costs.

But the margin also appears to have expanded. For example, lenders may advertise their rates as follows: "an average of prime plus 3.6 percent to prime plus 7.85 percent, depending on credit history."

Keith's not sure why his interest rate jumped to its current level. He doesn't remember agreeing to pay 9-plus percentage points above the prime rate. Other than looking for a good job to cover the tab, he has no idea how he'll pay off his debt since he hasn't been allowed to refinance as he had hoped. Stuck, he's suspended payments with a forbearance and admits he's panicked about the future.

"The worst-case scenario is they garnish my wages and they take up to 10 percent of my income. Looking at what I make now," he adds with a rueful laugh, "that would be about one-fifth of what they're asking for now, so it sounds pretty good to me."

University of America Inc.

Meanwhile, some schools are getting into the private loan business themselves. American University in Washington, D.C., for example, works in cooperation with Bank of America to offer the American University Educational Loan. It's managed by First Marblehead, a company that specializes in custom-branded college loans.

American University requires Bank of America to limit interest rates at competitive prices, says Brian Lee Sang, director of financial aid at American. Specifically, American won't let Bank of America charge more than a margin of 3.6 percentage points over the LIBOR rate -- a total of 8.95 percent at current rates.

By comparison, says Sang, many other private loans charge the prime rate plus a margin of 3 to 4 percentage points more for a total of roughly 11 percent to 12 percent at today's prices.

"We're forcing them to take less of a profit," says Sang.

Even so, Sang admits private loans, including American University's, "aren't the best form of financial aid. They should be used only when absolutely necessary."

Instead, Sang "really encourages the PLUS over this (school) loan." It's cheaper, and it comes with a fixed rate, so prices stay in check. Not so with the American University product, which is variable.

Sang's pitch for the PLUS may never be heard by borrowers.

When loans feature a school brand, students and parents alike assume it's the best deal, say critics such as Alan Collinge, founder of Student Loan Justice in Washington, D.C., an advocacy group.

"Students innately trust their universities," says Collinge. "They see the name and trust it's in their best interest to get the loan. But there may be other lenders who are willing to give better terms."

College financial aid offices: What are their roles?

Most students turn to college financial aid officers for help. But they may not get adequate guidance. Keith, for example, wasn't told he might be unable to slash rates as he'd planned. Instead, he was given a list of "preferred lenders" who could provide money. That's standard practice at universities and colleges. Yet it's unclear what makes a lender deserve special recommendations from a college.

Some schools consider costs when choosing top lenders. Others look for those with high approval ratings. There's no standard on how colleges pick, says Dallas Martin, president of National Association of Student Financial Aid Administrators. "There's a variety of things colleges look at and we try to encourage them to look at the comprehensive picture. Whether or not everyone does, I can't answer that."

That's not good enough for Senator Dick Durbin. The Illinois Democrat recently called for a federal investigation into conflict-of interest deals between lenders and universities following increasing press reports that schools are getting inducements for helping drum up loan business.

Laws prohibit inducements to colleges in the federal loan program, but no such regulations exist for private loans.

"The student should know whether their school is receiving an inducement in exchange for the loan," Durbin wrote John Higgins Jr., the Inspector General of the U.S. Department of Education.

Federal financial aid: limits and myths

Government Stafford loans are a popular option for students. In the 2005-2006 school year, more than 6 million undergrads borrowed money through the Stafford loan program, to the tune of $37 billion. Those issued since July 1 of last year come with a fixed 6.8 percent rate, and most students can get one. The bad news: They may not provide enough cash to cover costs.

For the 2007-2008 school year, students who are still their parents' dependents may borrow up to $3,500 the first year of college, up to $4,500 the second and $5,500 during both their junior and senior years.

Those Stafford caps have become a big selling point among private lenders.

"Borrow up to $130,000 in student loans," reads a Web site for NextStudent Inc., a Phoenix-based lender. "Get your money fast."

Nevertheless, the federal funding gap may be the biggest myth driving the private loan industry. Contrary to popular belief, it is possible to obtain lots of financing from the government. The catch: Parents need to get involved, says Cindy Bailey, executive director of education finance at the College Board.

"The PLUS loan should be your first choice, after the Stafford," she says.

Available to parents of undergrads and to grad students directly, the PLUS loan generally lets borrowers obtain as much as they need, minus financial aid, says Bailey. Moreover, since July of last year, the PLUS features fixed interest rates, so costs won't spiral out of control. Rates are set at 7.9 percent or 8.5 percent, depending on the loan program offered by the school. Both rates are cheaper than many private deals, Bailey adds.

Experts say that a typical rate for a private loan now runs in the neighborhood of 10 percent to 11 percent. Students with weak or poor credit pay as much as 16 percent to 18 percent to borrow. No matter how expensive they are, nearly all private loans have variable rates. That means, unlike the government PLUS loan, rates on private deals will fluctuate.

Students can avoid some confusion with a clear understanding of loan terms. In general, variable loans require borrowers to pay a certain margin over the rate of a specified index. The better their credit, in the eyes of lender, the less they'll pay. But typically, the index used is the prime rate, which is now 8.25 percent. As the index rises or falls, so does the interest rate that's owed on a loan.

The key: When shopping for a private loan, compare terms by finding out which index is being used plus the margin amount -- or number of percentage points you'll pay over and above the rate. Make sure you get the best out of private loans. Despite the benefits of a PLUS, parents -- even those who co-sign on private loans -- don't get them.

Bob Shireman, president of Project on Student Debt, says private lenders steer individuals away from such programs as the PLUS.

"Some of the companies are saying things like 'there's no scary federal forms to fill out,'" says Shireman. "By making it sound easy, and making it sound difficult to apply for or get a government loan, they get more borrowers."

The Web site for Alternative Student Loan in Quincy, Mass., which markets private college loans for a variety of private lenders, tells prospective borrowers: "No FAFSA or other government paperwork needed." The FAFSA is the government application for federal financial aid.