On The Money Trail
Choices abound on how best to pay for college
Loans
If you haven't saved enough for college through a 529 or other plan, your last-chance option may be a loan. But loans have gotten much more expensive recently-and sometimes unfairly so, according to allegations by prosecutors.
Last week, New York's attorney general reached settlements with 35 schools to make it more difficult for financial aid offices to steer students to unnecessarily expensive loans. And Congress is debating bills that could slash the interest rates on federally backed education loans.
The evolving rules make it especially important for students and parents to shop carefully for loans. Choosing the right loan and lender could mean a savings of thousands of dollars.
Perkins loans are the best deal, charging just 5 percent interest, but they are available only to low-income students, and only in amounts of $4,000 a year or less.
Stafford loans are students' next best deal. They now charge 6.8 percent. But the House of Representatives has passed a bill that would cut the interest rate in half next semester. Private lenders are fighting that bill, which would reduce their profits, so its fate is uncertain.
Nearly any student can get an unsubsidized Stafford loan. Lenders don't send out bills for these loans while the student is in school, but they quietly add the interest to the total debt. A freshman who borrows $3,500 would actually owe more than $4,500 by the time the bills start arriving after graduation.
Parents with good credit can borrow the full net cost of a child's college education (the cost after other financial aid has been subtracted) through the federal PLUS program. But John Nametz, director of financial aid at the University of Arizona, says his staffers can help most parents fix credit problems enough to qualify. "If they are motivated, we can help them," often by advising them to find a friend or relative to cosign a loan.
Choosing the right loan is only half the battle, however. Choosing the right lender can also save thousands of dollars. New York Attorney General Andrew Cuomo announced last week that the State University of New York's 29 campuses and six other schools would reimburse students a total of $3.3 million that the colleges were paid by lenders for loan business. The schools, denying any wrongdoing, also agreed not to accept payments for putting companies on "preferred lender" lists. Citibank, one of the biggest lenders, agreed not to pay schools for loans and to contribute $2 million to a fund to educate families about student loans. A separate investigation by the New America Foundation revealed last week that financial aid officers at three prominent universities held shares of a student loan company that was on each of the schools' preferred-lenders list.
About 20 percent of schools require students to borrow directly from the federal government. But any school that allows students to shop should accept a loan from any government-approved lender. One way to find lower-cost loans is to search among nonprofit lenders at www.efc.org.
advertisement
