The letters drift in all spring, bringing joy and disappointment to high school seniors anxiously awaiting a verdict on their college dreams.
Admissions letters? Actually, we're referring to financial-aid award letters, which spell out how much of the college bills each school (and the government) is prepared to cover. For some students, the letters bring glad tidings of scholarships, which don't have to be paid back. Others get an invitation to borrow -- and most RSVP yes. The average student debt over four years comes to almost $20,000, a figure that doesn't include money parents owe. "We have no qualms about borrowing," says Robert Bray, whose son, Matthew, took out loans to help finance his freshman year at the University of California at Santa Cruz. "It's an investment in his future."
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Fair enough, but figuring out which loans to get, and where, can feel like taking an Advanced Placement test for a class you've never attended. Complicating matters, the New York State Attorney General's Office has turned up irregularities in the way some financial-aid offices put together their "preferred lender" lists -- the companies that schools recommend when they send out their financial-aid letters.
Although most financial-aid offices operate in good faith, the controversy is a reminder to do your own homework.
Where to start
Luckily, the best strategy is also the most straightforward. "Go with federal loans first," says Robert Shireman, executive director of the Project on Student Debt. Not only do new federal loans carry a fixed interest rate, but they also are easy to apply for, and offer flexible repayment terms and, in some cases, a government subsidy for part of the interest.
As with other loans that are used for higher education, you can deduct interest payments of up to $2,500 per year. The deduction disappears for married couples who are filing jointly and have an adjusted gross income of $135,000 and for singles with an adjusted gross income of $65,000.
Grab a Perkins. First among equals in the federal-loan lineup is the Perkins, which offers students up to $4,000 a year at a fixed 5%. The feds pick up the tab on the interest until the loan comes due. Students can defer repayment for nine months after leaving school and spread the payments over ten years. Graduates who work as teachers or social workers in low-income neighborhoods or who fill other needed jobs may qualify for loan forgiveness.
You don't have to shop for a lender to connect with a Perkins. Schools distribute the dollars themselves. These days, they dole them out sparingly.
The federal fund that supplies the loans "isn't being replenished to the full amount," says Justin Draeger, of the National Association of Student Financial Aid Administrators. Students who are lucky enough to be offered a Perkins loan should waste no time accepting it.
Secure a Stafford. After the Perkins, "the Stafford is the loan you want to go with," says Gary Carpenter, a certified college planner in Syracuse, N.Y. Available to any student who applies for federal financial aid, it carries a fixed rate of 6.8% -- not bad, compared with the recent prime rate of 8.25%. (Stafford loans disbursed before July 2006 have a variable rate, which adjusts each July based on the 91-day Treasury bill at the end of May.) Students may borrow up to $3,500 a year as freshmen, $4,500 as sophomores, and $5,500 as juniors and seniors.
If your family qualifies for need-based aid, the federal government will pay the interest on the Stafford until the loan comes due. Otherwise, interest starts building on day one. Students can defer repayment until six months after graduation and extend repayment from the standard ten years to as many as 25, lowering the monthly amount (but adding to the overall cost of the loan).
Uncle Sam makes for a lenient lender, as long as you don't duck out on your obligation altogether. Borrowers who ask for forbearance can postpone payments for up to a year at a time and defer them if they return to school.
As with Perkins loans, Staffords can be forgiven under some circumstances.
Add a PLUS. But even a Stafford and a Perkins combined won't get your kid through a whole year at a private university, where the average annual cost runs about $30,000. To cover the gap, look to a PLUS loan (Parent Loan for Undergraduate Students), the parent's equivalent of a Stafford. PLUS-loan interest is fixed at 8.5% (the rate on PLUS loans issued before July 2006 remains variable, capped at 9%).
You must pass a basic credit check to get this deal. Once approved, you can borrow up to the total cost of attendance, minus any financial aid. Although the standard PLUS loan requires you to start repaying within 60 days of disbursement, some lenders allow you to defer repayment until your child has left school. As of July 2006, grad students can also apply for PLUS loans. That's great news for students who would otherwise load up on private loans, which carry variable rates and tougher terms.
Find a lender. Where do you get these generous deals? Schools that participate in the Federal Direct Loan Program give you direct access to Uncle Sam's largesse; the government funds the loans, and the school administers them.