Guide to College Financing Chapter: 1 2 3 4 5

Student and Parent Loans

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Almost two-thirds of undergraduate students attending four-year programs have to borrow money. Some of these students get in way over their hands, while others absorb the debt in stride.

Almost two-thirds of undergraduate students attending four-year programs have to borrow money. Some of these students get in way over their hands, while others absorb the debt in stride.

Introduction to student loans

Education-related loans can be made to students or parents through federal programs and private lenders:

• Federal student loans: Federal student loans include Stafford Loans and Perkins Loans. The former are made through a bank or the U.S. Department of Education, while the latter are made directly through the school. Both programs are heavily regulated, thus protecting borrowers from high rates and fees. But these same programs also limit the amount of money you can borrow. Students who need more must turn to private lenders.
• Private student loans: Private loans made by banks and other financial institutions are not subject to federal regulations. Fees, rates, and available loan amounts vary significantly from lender to lender. Shopping around for the best deal is a must.
• Federal Loans to parents: Federal PLUS Loans are made to parents and guardians of college students. These are based on credit histories rather than on financial need. Parents with good credit can borrow as much as the full cost of education at competitive, fixed interest rates.
• Private loans to parents: Parents can also borrow money from banks and credit unions. As with private student loans, these vary dramatically in cost and type. Some financial institutions offer loans specifically for tuition, while others may recommend home equity loans or personal loans to cover these costs. Parents may also be able to borrow against life insurance policies or retirement funds.

Repayment of your student loans after graduation will be your final college-related challenge. While the deferred repayment structure of student loans makes sense, it can create some problems. Since you don't know what your income will be, you don't know what size repayment you can afford. For this reason, it's best to borrow only what you need and not a penny more. Even so, you still might find your repayment requirements to be unmanageable. That's when it's time to consider debt consolidation.

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