Paying For College-Part II- June 1, 2008

Last week I discussed how to find free money for students through scholarships and grants. The next best thing to free money is low interest student loans. The federal government provides loan programs for students and parents to finance college costs at low interest rates.

Student loans remain the most often sought solution for paying for college. The list below offers your best choices for tapping into both federal and private sources for money for higher education:

  1. Federal Stafford Loan. This is the largest student loan program for funding undergraduate and graduate education. Stafford loans are low interest rate loans that the student borrows in his or her own name. A student must complete a FAFSA (Free Application for Federal Student Aid) at For the 2008-2009 school year, it is highly recommended that you have your application completed by the end of June. The student will receive either subsidized loans and/or unsubsidized loans. A subsidized loan is when the government pays the interest while the student is in school and during grace periods. The unsubsidized is a loan where the student is responsible for interest from the inception of the loan. The payments on both types of loans are deferred until after graduation. The interest paid is tax deductible up to $2,500 if you are within certain income limits.
  2. Federal PLUS Loan. These are federally sponsored loans with a low interest rate for parents of students. Plus loans have no income or collateral requirements for qualifying. The parents can postpone payment until graduation and the interest paid may be tax deductible if you do not exceed the income limit.
  3. Federal Perkins Loan. These loans are reserved for students with ‘exceptional’ financial need and offer a low (5%) fixed interest rate.
  4. Private Student Loan. Private student loans are acquired through private institutions such as banks. These loans are available if federal aid is not enough to meet the cost of education. The interest rate on private loans is much higher than federal loans and the rate and fees are determined from your credit rating. Private student loans are based on a variable interest rate so your payment and interest will fluctuate. I would recommend using private loans only after you have exhausted your resources from federal student and plus loans. Also private student loans cannot be consolidated with federal loans.
  5. Federal Graduated PLUS Loan. Specifically designed for grad students and professionals, the Federal grad Plus Loan program allows students to borrow up to the costs of education minus any financial aid received.

Once the student has graduated then he or she should consider student loan consolidation of all federal Stafford loans. It will allow the student to have only one monthly payment and most likely give you a lower payment. The biggest advantage is you will have a low, fixed interest rate that cannot exceed 8.25% at any time.

For more information about student loans, go to the Resource Center at and click on ‘College Funding- Student Loans’. Next week, in the final installment for this series, I’ll discuss the best strategies for prefunding education for your child.