At an effective rate of 7.1 percent, when the prime rate is just above 3 percent, Staffords might look expensive. But they offer many unique benefits, such as new forgiveness programs for public servants and an income-based repayment plan that will allow debtors to cap their payments below 15 percent of their income.
Parents can tap education loans that cover the student's entire cost of college (less any other financial aid) through the federal PLUS program. PLUS loans aren't cheap, unfortunately. They can cost as much as 8.5 percent a year plus a fee of 4 percent of the loan amount, for a total annual rate of as much as 9.4 percent. But shopping around can reap a few discounts. Those who borrow directly from the federal government and make automatic electronic payments are charged just 7.65 percent in interest, for example. (After fees, the APR totals 8.55 percent.) And there are other benefits: While PLUS applications do require a credit check, the standard is comparatively forgiving, even OK'ing parents who are a little behind on their mortgages. Also, PLUS loans allow parents to defer payments until the student is out of school (though the interest does keep building up.)
Ask your school: Traci Smith was heartbroken last summer when she got turned down for a PLUS loan, and it looked as if she wouldn't be able to send her daughter, Rhea, to the University of Redlands in Southern California. When Traci called to alert the school's aid office, however, the officer told her the school had just joined a growing number of colleges making loans to recession-strapped parents like her. Redlands lent the Smiths the last $3,200 they needed to pay their bill. Now, Rhea is hard at work studying to become a music teacher. "Without that loan, I would have had to change my aims and profession" since her local community college doesn't have many music education courses, says Rhea. "That loan saved me."
Many schools also offer Perkins loans, which are federally backed loans for needy students that charge no interest while students are in school and just 5 percent after they leave. Unfortunately, colleges have a limited amount of Perkins money and so can't always award these loans to everyone who qualifies.
While many school loans are good deals, Lauren Asher, acting president of the Institute for College Access and Success, warns that students shouldn't automatically accept all loans they are offered. "Just because the loan has the school's name on it doesn't mean it is the best you can do," she says.
Alternatives: Some charities and new Web companies are giving students a chance to borrow at no or low interest.
After suffering with $50,000 in private law school loans charging 7 percent a year, recent New York Law School graduate Sarah Kelly found a way to save herself thousands of dollars. She and her parents signed a Student Payback contract offered by Virgin Money. Her parents paid off her expensive private loans. In return, Virgin Money withdraws from Sarah's checking account a monthly payment that will eventually pay back her parents everything plus minimal interest. The lower interest cuts the total she'll end up paying by thousands of dollars. Virgin Money makes the transaction easy and unemotional by turning her family debt into the same kind of payment as a utility bill. "I don't have to think about it," Kelly says. Other companies, such as GreenNote, offer would-be borrowers the ability to send out electronic appeals for private student loans.
Private lenders: The credit crunch has wiped out most of the private, alternative (also sometimes called "signature") educational loans. But students who can find a U.S. citizen with good credit (a FICO score of at least 700 is generally required) to guarantee payments can usually find a bank willing to lend them at least a little money. Financial experts suggest private loans be considered only as a last-ditch alternative, however, as they can be onerous. "It used to be that anyone with a pulse could get a loan," says Greg McBride, an analyst for Bankrate.com. "Now you've got to jump through more hoops than a circus act."