The Best College Loans Made Clear for Parents and Students
by www.SixWise.com
College is rewarding, inspiring and increasingly a necessity
in today's competitive job market. It's also expensive. Very
expensive. Students nowadays can expect to cough up anywhere
from $13,000 to $30,000 every year to attend the school of
their choice.
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The average college education now costs between $13,000
and $30,000 a year.
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Scholarships
are one financial aid option to help defray the costs, but
not everyone qualifies for these awards. The alternative is
a college loan, which, although it has to be paid back, student
loans usually have low interest rates and long terms in their
favor.
There are numerous types out there, both from federal and
private sources, and doing your homework first will ensure
you find one that's right for you.
Federal and State Loans
To qualify for federal and state student loans, the student
must first complete a FAFSA (Free Application for Federal
Student Aid), which is available from high school counselors,
online
or by calling (800) 4-FED-AID. Here's a breakdown of some
of the options:
Perkins Loans
These loans have a low, fixed interest rate and can be paid
back over a period of 10 years. Undergraduate students can
borrow up to $4,000 for a year, while graduate students can
borrow up to $6,000 a year.
Students don't have to begin repayment until nine months
after they graduate or drop below half-time status (those
in the military may have longer).
In certain circumstances, such as students who become certain
types of teachers, serve in the military in a hostile area,
or work for certain family services jobs, Perkins loans can
be discharged or cancelled.
Each school gets a certain amount of federal money for Perkins
loans each year, so the sooner you fill out your FAFSA, the
better your chances.
Stafford Loans
Stafford loans have slightly higher interest rates than Perkins
loans, but students get from 10 to 30 years to pay them off.
Students who still qualify as their parents' dependents can
borrow up to $3,500 their freshman college year, up to $4,500
their sophomore year and $5,500 during both their junior and
senior years.
There are two types of Stafford loans: subsidized and unsubsidized.
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Subsidized: Based on financial need. The government
pays the interest while the student is in school (students
must begin repayment on interest and principle six month
after graduation).
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Unsubsidized: These are not based on financial
need, so the student is responsible for the interest charges
from the date the loan is issued.
PLUS Loans
Parents who wish to borrow money to pay for their child's
education can do so with a Parent Loan for Undergraduate Students
(PLUS). These loans generally have lower interest rates (they
can only go up to 9 percent) and more flexible repayment options
than loans from private lenders.
To qualify, families must pass a credit check and students
must meet certain eligibility requirements. Parents can borrow
the full cost of their child's education (less any financial
aid received).
Interest-Free Loans
On a statewide level, certain states offer students interest-free
loans (as long as it is paid back within a certain time period).
Once you fill out a FAFSA, you will automatically be considered
for state programs along with federal ones.
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Generally speaking, you should seek out financial aid
you don't have to repay first (scholarships, work-study
programs, grants, etc.), then apply for federal loans,
and only then apply for private loans (if necessary).
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Private Loans and HELOC
Though federal loans offer a relatively safe choice for borrowing
money, federal law gives you the right to get a college loan
from any lender of your choosing.
And, because of rising tuition rates, private college loans
are growing increasingly popular. In 2006, they totaled over
$17 billion, according to the College Board, while a mere
decade ago they made up just 4 percent of college loans.
Private Loans
Private loans can sound enticing as they offer large loans
upfront. However, they have somewhat higher interest rates
(the current average being about 10 percent to 11 percent,
and up to 18 percent for those with poor credit) and the rates
are not fixed or capped.
Meanwhile, private loans sometimes entice students to borrow
more than they should, and then, when interest rates go up,
recent grads can find themselves in financial
hot water.
HELOC (Home-Equity Line of Credit)
Parents can also opt for a HELOC to pay for their child's
education. HELOCs are open-ended loans that are paid as revolving
debt (and are backed by your home's equity).
They typically offer relatively low interest rates (currently
about 7 percent) and allow you to pay just interest for the
first few years, if you want. Plus, interest paid on a HELOC
is typically deductible.
Beware of This Loan Scam
Loan giant Sallie Mae and two others have agreed to multimillion-dollar
settlements because of unethical business. The companies have
been paying off colleges in order to win a spot on the colleges
"preferred lender" list -- which then gets passed
on to students eager for college money.
The problem is that the schools may have been pushing certain
lenders even when it was not in the best interest of the student,
and more investigations are underway.
Also, private student loan lenders are known to use slick
advertising to entice students to use their products (even
when federal loans may be a better deal).
You can protect yourself when looking for a college loan
by exhausting all other forms of financial aid first (scholarships,
work-study programs, grants, and more), then opting for federal
loans, and then, finally, a private loan if necessary (and
be sure to read all the fine print carefully before signing
anything).
Recommended Reading
Why
Returning to College After Age 30 (Age 40, 50, Etc.) Might
Be Just The Right Choice For You
Scholarships
for Students: The Quick-Guide for Finding the Most & Best
for College and Beyond
Sources
Bankrate.com
CNNMoney.com
May 3, 2007
Yahoo
Finance February 27, 2007