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The Best College Loans Made Clear for Parents and Students

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.

average college education costs

The average college education now costs between $13,000 and $30,000 a year.

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.

  • 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).

  • 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.

financial aid

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).

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 May 3, 2007

Yahoo Finance February 27, 2007

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