Many parents and students are now considering their options with financial aid letters in hand.  Ultimately, after any grants and scholarships, most families still have college costs to cover.  Where can you go to get some help in these tough economic times?

First, do not fall into the credit card trap!  There are many other options that you might consider first.  Before entering into the private loan business for a solution we recommend first using the federal student loan programs since these federal programs offer fixed interest rates and no principal repayment until the student graduates (or drops below half-time status).

The Federal Student Loans:

1. Perkins Loan: With a fixed interest rate of 5.0% and no principal repayment or interest until after the student leaves college, traditionally it has been the most attractive student loan option…and there is no co-signer required. But here’s the catch. The colleges control who gets it and how much. It also is supposed to go to the students with the lowest Expected Family Contributions (EFC) under the federal financial aid formula.
2. Stafford Loan: The Stafford loan is the more universally available student loan option because a student who is a citizen or has Permanent Resident (green card) status can borrow it. Like the Perkins, there is no co-signer required. The interest rate for a subsidized (the government pays the interest on it while the student is in college) Stafford currently is 5.6% but if dispersed after July 1, 2010 the rate drops to 4.6%.  An unsubsidized (students pay interest only while they are in college or they have the option of compounding the interest and adding that amount to the loan principal) Stafford loan currently has a static 6.8% interest rate from year to year. Regardless of a student’s financial situation, all students who complete the FAFSA (Free Application For Federal Student Aid) and meet the other eligibility requirements, may borrow through the Stafford loan program.  The current Stafford Loan limits are $5,500 for the first year of college, $6,500 for the second year and $7,500 for the third and fourth years (although Independent Students and those whose parents cannot get a PLUS Loan for credit reasons may borrow additional Stafford loan dollars.)  Be sure to check the terms of any loan; in fact, there may be opportunities to lower the interest with terms such as on-time payment breaks or automatic withdrawal arrangements.

The Parent PLUS loan program: After exhausting the student loan programs, credit worthy parents may turn to the PLUS loan.  The annual borrowing limit is equal to the student’s total cost of attendance minus any other financial aid received like the Stafford or Perkins loans.  The interest rate is fixed at 7.9% for all direct PLUS loans.  As with student loans, be sure to shop around for the best terms.  A student whose parents cannot obtain a PLUS loan for credit reasons is eligible to take out up to an additional $4,000 through the unsubsidized Stafford loan program.

Payment Plans: Many colleges have plans that provide the opportunity to spread payments out on a monthly or quarterly basis.  Some colleges may even have plans with no deferment charges.

Other Options:

1. A Home Equity Line Of Credit (HELOC): Using your home as collateral, a HELOC differs from a conventional loan.  With a conventional loan, the amount borrowed is the total amount financed and there is the opportunity to set a fixed interest rate.  A HELOC allows the homeowner to borrow up to a pre-determined amount, if and when they would like, but they don’t pay any interest until they borrow money.  The borrower usually has the option of interest-only payments and can determine how much they need to pay back over the agreed upon repayment period.  Typically the interest rate for a HELOC is calculated using the average daily balance and the Prime Rate, plus the margin designated by the bank or lender.  As with any loan, the borrower should carefully read the fine print and investigate the terms of the HELOC.
2. Insurance Policy Cash Values: Some parents have the option of borrowing against the cash value that has built up in a “whole life” (not term) kind of insurance policy. You should weigh your options, but if the only way you can raise money is by getting advances on credit cards that carry interest rates of as much as18 to 24 percent, it’s likely you’ll be better off borrowing against your life insurance. For example, one of our client families borrowed cash value at 8% interest on the amount borrowed, but the money borrowed was still earning 7.5% under the insurance company’s investment program!
3. Retirement plans: This is an option most parents use only if they have no others.  We definitely don’t want to see parents cashing out their retirement accounts to pay for their child’s college costs, but it may make sense to borrow against your assets. Again, before using this option, please be sure it makes sense for your situation.
4. Relatives: Some students have loving relatives such as grandparents that want to help with their college education. Helping with college costs becomes a living legacy they get to see firsthand, as opposed to simply a part of their estate.

With these volatile financial times you may want to further discuss your options. Remember, you always have the staff here at the National Center for College Costs to help you through this sometimes stressful milestone.