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Think Hard Before Borrowing for College

You might be better off deciding on a cheaper school instead.

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Parsing the college financial aid letter is key to calculating what the true load will be. It may seem obvious, but a loan doesn't lower your cost of college; with interest, it increases it. It's not always easy to tell from the aid letter which awards are grants and which are loans, so when in doubt, ask.

[Read these 5 hints for comparing financial aid award letters.]

What are your borrowing options? Experts advise always seeking a government loan first because they are cheaper, the rates are fixed, and you have an option of different repayment plans. The government pays the interest on subsidized Stafford loans until graduation for families who qualify based on need. For dependent students, total borrowing is limited to $23,000 in subsidized loans and $31,000 in unsubsidized loans (minus what they receive in subsidized ones).

Interest rates on new subsidized loans awarded for this fall have fallen to 3.4 percent; the rate for unsubsidized loans is fixed at 6.8 percent. Parents can take out government PLUS loans up to the cost of tuition minus any student loans awarded. The rates are fixed at 7.9 percent, and there is a 4 percent fee. Private loans may offer currently competitive rates, but they're often variable, with no cap on rates or fees.

With federal loans, you might get a break on repayment, too. Several income-based repayment plans allow borrowers to make monthly payments based on their earnings and family size, and extend the term from the standard 10 years to 12 to 25 years. Graduates may also qualify to have their balances forgiven after 120 payments and 10 years of public service. But student loans are very difficult to extinguish by bankruptcy; wages, tax refunds, and even Social Security can be garnished to pay for them.

[Consider the benefits of federal student loans.]

The experience of Lindsay McAfee, 29, a tax lawyer in Washington, D.C., who grew up in Des Moines, might be instructive. Though she had some help from her parents, she bore most of the cost of a bachelor's from George Washington University and a law degree from the University of Iowa, and is now paying off $165,000 in student loans at $1,100 a month. The payment is a "big burden, very, very painful," she says. She does not take lavish vacations. She does not own a car.

As her youngest sister was finishing high school this spring, McAfee passed along some of her insight. "I think you have to take a hard look at what you think you will earn with what you're studying," she told her sister. "I wouldn't trade my experience for anything, but I also would like not to have that debt." As luck would have it, McAfee's sister preferred Iowa State University.

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