Yikes!  $125,000. average debt for medical school!  Please read
 
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January 8, 2006
Spending It

Borrower Be 

By SANDRA SALMANS

WITH the last college application mailed off, it's time for would-be
freshmen and their parents - not to mention returning students - to turn to
the subject of financial aid. Increasingly, that quest means selecting a
loan from a bewilderingly varied range of offerings. Now there's a
double-whammy: not only are you likely to be borrowing more, you can expect
to pay higher interest rates as well.

Student loans recently overtook grants as the leading form of financial aid
for undergraduates, a trend likely to accelerate as college costs continue
to rise. Two-thirds of students graduate with some debt: the average for a
senior in 2004 was $19,200, according to the United States Department of
Education, and for a newly minted M.D., $125,800. "Borrowing, unfortunately,
will become the price of postsecondary education," says Brett Lief,
president of the National Council of Higher Education Loan Programs, which
represents private lenders. "In the future, just about everyone's going to
have to borrow."

All that borrowing will almost certainly become costlier, too: a bill that
nearly passed Congress days before the holidays would raise interest rates
on student loans and impose fixed rates, thus eliminating most incentives to
consolidate loans to lower your payments. One benefit for students: the
legislation would reduce the origination fees that many borrowers pay when
taking out loans. The Senate and House are expected to reconcile differences
when they reconvene after the winter break. 

Federal loans come in three types: the Perkins, Stafford and PLUS (the
Parent Loan for Undergraduate Students). A growing number of borrowers are
supplementing these with private loans, whose terms vary widely. For
families shopping for loans, here are the choices, in order of most
desirable to least:

PERKINS LOANS For students with exceptional need, the Perkins, at a fixed 5
percent interest rate, should be the best deal this year. But total Perkins
borrowing maxes out at $20,000 for an undergraduate's entire college career.

STAFFORD LOANS With $50 billion to lend, Staffords are the biggest program
and come two ways: for those with financial need, the government pays the
interest until the student is out of college; unsubsidized loans are
available to everyone, and begin to charge interest right away. Low rates
have made Staffords especially appealing, but that will change on July 1,
when the rate rises to 6.8 percent. (Unfortunately, students cannot lock in
the current rate, 4.7 percent, for the next academic year.) Most students
are limited to $23,000 in total Stafford money. For those not supported by
parents, the cap doubles, and increases to $138,500 for graduate students. 

While the Stafford is federal, only about 25 percent of this money
represents direct lending from the government. Most colleges provide
Staffords through banks or other private lenders and send students lists of
preferred ones. But borrowers are free to hunt around. Many lenders give
discounts for prompt repayment or when payments are debited directly from
bank accounts. "Look for discounts that are immediate," says Mark
Kantrowitz, publisher of the Web site finaid.org, adding that borrowers must
pay attention to the terms of the loans: "It's very easy to have one late
payment" and forfeit the discount. 

PLUS Parents can borrow up to the total cost of undergraduate education,
minus other aid. Under the new legislation, interest rates would rise to 8.5
percent, from 6.1. But for the first time, graduate students would be
allowed to borrow up to $12,000 annually in their own name. PLUS loans have
historically been underused, Mr. Kantrowitz says, perhaps because parents
are reluctant to sign for their children and because PLUS traditionally
requires borrowers to begin repayment 60 days after disbursement.

PRIVATE LOANS These loans constitute the business's fastest-growing segment,
with an estimated $14 billion now on loan. Most charge much higher rates
than Stafford or PLUS and, unlike those loans, set higher rates for
applicants with poor credit. In the past, borrowers were often graduate
students, for whom PLUS wasn't an option. And with a cap on the amount of
federal money that can be borrowed, many students have no choice but to turn
to these loans, which have ceilings of $100,000 for undergraduates, $150,000
for graduate students and no limit with a cosigner. Also, parents are often
released from their obligation if the student establishes a good repayment
record. Some lenders, like myrichuncle.com, cut rates for top-performing
students who are headed for lucrative careers. 

Finaid.org, Mr. Kantrowitz's Web site, lists private lenders. For those
navigating the loan maze, he advises: "Live like a student now, so you don't
have to after school."


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