4 Ways to Find Cheap Student Loans

The recession has generated some unexpected silver linings in student loan options.

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The Wall Street collapse and the national recession have wiped out those cheap and easy $40,000 student loans that were advertised on late-night TV last year and have raised the real costs of many remaining education loans But the financial storms also have created a couple of surprising silver linings. Most students can still get enough reasonably priced loans to cover the bulk of tuition at local public universities. And some students and parents actually will get better deals than ever before. The government is cutting interest rates on the loans it makes to the neediest students, and lucky parents who still have good credit and lots of home equity are able to pull college cash out of their homes at record-low interest rates. What's more, a growing number of colleges are trying to fill the loan vacuum by offering students comparatively low-cost supplemental loans.

Finding bargain educational loans can take a little work, though, discovered Gary Krist, the father of a Bethesda, Md., high school senior. He was shocked when he saw the expensive loans packaged into his daughter's financial aid offers this spring. After fees, some federal parent loans, such as the ones Krist originally was offered, will cost more than 9 percent a year. "I was so trusting that they would give us a good deal. It was disillusioning," Krist says.

So he started shopping around for cheaper alternatives. Krist, who bought his home in the Washington suburbs long before the real estate bubble started, was able to get a home equity line of credit starting at about 4 percent. Since that interest will be tax deductible, his real cost will be even lower. Krist, an author who wrote a novel about financial bubbles, is betting economic troubles will keep interest rates and his payments low for months if not years. "Just because a loan offer comes with the imprimatur of the government or a respectable institution of higher education doesn't mean you can't get a better deal elsewhere," Krist says.

Of course, students are better off if they can pay for college without borrowing at all, perhaps by choosing lower-cost schools or raising lots of free grant and scholarship money, for example. But the harsh reality is that while underclassmen can attend community college for, typically, about $2,500 a year in tuition, upperclassmen typically have to pay an average of about $7,000 a year for tuition, plus an additional $1,000 for books. Living away from home typically adds $10,000 or so in housing, travel, and food expenses. And there simply isn't enough scholarship money to help every needy student. So loans are often the only way to pay for a degree.

Nevertheless, the payoff of college is typically high enough to warrant at least a few thousand dollars in debt each school year, experts say. And a few smart moves now can make those loans especially affordable.

Start with the feds: The single biggest and best source of student loans for fall 2009 is the federal government, says Edie Irons, spokesperson for the Project on Student Debt. The first step to getting federal loans: Fill out the Free Application for Federal Student Aid.

All full-time students who complete a FAFSA can borrow at least $5,500 a year through the Stafford student loan program. Students who are at least 24 years old or whose parents have bad credit can get Stafford loans of up to $9,500 to $12,500, depending on their year in college. Staffords for the fall of 2009 will charge no more than 6.8 percent a year in interest plus a 1.5 percent upfront fee, for an average annual rate of 7.1 percent. Students who qualify as needy may be able to get Staffords that charge no interest at all while they are in school and just 5.6 percent after graduation.

About two thirds of colleges allow students to shop around for the best Stafford deal instead of funneling loan applications directly to the federal government. The credit crunch has eliminated most of the good deals common in previous years. But a few lenders are still offering small sweeteners. Many nonprofit lenders, such as the College Foundation of North Carolina, and some for-profit companies, such as Discover, waive most or all of the upfront fees and knock a fraction off the annual rate for automatic payments. Those kinds of discounts typically save borrowers several hundred dollars over the life of the loan.