College Finance 101: A Money-Saving Crash Course for Parents

Lesson 2: Loans

Most students finance their education with borrowed funds. According to FinAid.org, 65.6% of students graduate with education debt, and of students who attend private college, 72.8% graduate with debt. The average amount of money owed by African American students leaving school is $19,800. For those who don’t have enough ready cash, Uncle Sam has a federal loan program that may provide an answer, but it pays to be an educated consumer.

Borrow wisely. “Stafford loans are available to students who fill out the Free Application for Federal Student Aid, or FAFSA,” says Mark Kantrowitz, publisher of FinAid.org. All students are eligible to take out these loans regardless of their credit histories, and they do not require collateral or a co-signer. (See chart.)

Former law limits apply to subsidized Stafford loans, which have lower fixed interest rates: 5.6%, as of July 2009, versus 6.8% for unsubsidized Stafford loans. The loan is “subsidized” because the government pays the interest while the student is in school, while with unsubsidized loans, the student pays all the interest.

There are loan forgiveness options that your student may want to consider as well. If your child serves in the military or performs certain volunteer work after graduation, he or she may be eligible to have part of the loan forgiven. Explore these options at FinAid.org.

Stafford loans may not cover the entire college bill, so federal PLUS loans are also available. Parents can use PLUS (Parent Loan for Undergraduate Students) loans to borrow the full cost of attendance, less any financial aid package.

At many colleges, PLUS and Stafford loans are offered directly by the federal government. If your child’s school does not participate in the direct lending program, you may be able to get PLUS loans from private lenders, but they may charge higher interest, 8.5%, as opposed to the government’s fixed rate of 7.9%. Repayment of PLUS loans can be deferred until six months after your child leaves school, but be aware that for PLUS and unsubsidized Stafford loans, deferred interest is added to the loan balance.

PLUS loans are subject to a credit check. Kantrowitz notes that independent students as well as those whose parents are ineligible for PLUS loans may borrow more than the Stafford loans’ stated limits.

Michael and Karin Zimmerman took out a $5,000 PLUS loan and intend to cap their son Chad’s student debt load at $10,000. “That’s about what I owed when I graduated, so I don’t want him to owe more,” Karin says. Andréa Holman of San Leandro, California, took out a PLUS loan years ago to finance her son Marcus’ education at Hampton University. “At the time, I saw it as an emotional safety net, but now I strongly advise parents to explore all their options before taking out a PLUS loan.”

If you do opt to take out a PLUS loan, determine to borrow intelligently. Be aware that PLUS loans charge a fee of 4% out of each disbursement. Come up with a plan and time frame for paying off the loan (there is no prepayment penalty). If paying the loan off early is not an option, be sure to ask your tax preparer about writing off the interest you’re paying. Even if you don’t itemize your taxes, you may be eligible to write off up to $2,500 a year in interest.

Here are the maximum amounts that dependent students can borrow:

* May exceed four undergraduate years

If you send your child away to college, room and board will be a major budget item. The charges are the second most expensive part of college. On-campus housing averages $8,000 a year, and over four years you can expect to pay $30,000 or more per student.