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."