Q. My daughter needs student loans to attend college. What should we do to minimize her long-term debt?
A. Americans now owe more money on student loans than on credit cards — nearly $830 billion compared with $827 billion on plastic. So smart borrowing, particularly with the after-college jobs market likely to stay tough for years, is more important than ever.
- Consider federal loans first. "They are cheaper, more available and have better repayment terms," says Kantrowitz. Another potential benefit: Federally guaranteed student loans have fixed interest rates, while student loans from private lenders usually have variable rates that may be lower than fixed ones now but can rise over the life of the loan. Compare different loan options at FinAid's loan page.
- Fill out the FAFSA. Some parents take a pass on filing the complex Free Application for Federal Student Aid, believing their incomes are too high to qualify their kids for need-based grants. Bad move. Although filing is no guarantee you'll receive aid, in 2008 some 2.3 million families would have qualified for a portion of a federal Pell grant if only they had applied, and half of those would have qualified for a full Pell grant of $5,550. Also, though financial need doesn't figure in access to an unsubsidized Stafford or PLUS loan, you still have to fill out the FAFSA. The form is available at most schools and many libraries, and you can also fill out the FAFSA online.
- Enroll in "auto debit" discounts. This allows the lender to automatically deduct monthly repayments from a bank account for repayment. It also typically lowers your interest rate, generally by 1/4 percent on a federal loan and up to 1/2 percent on a private loan.
- Cosign for your kids or grandchildren. Because financial institutions factor in a parent's typically higher credit score in their lending decisions, the loan will likely have better terms. Of course, keep in mind that if you cosign, you're committing to pay the loan if your kid doesn't.
- Consider making interest-only payments while the student remains in school. Interest starts accruing as soon as money is lent, and with an unsubsidized loan the interest is added to the principal if you wait until after graduation to begin paying off the loan. But if you pay interest as you go, the ultimate payback amount will not grow. How much should you seek to borrow? A good rule of thumb, says Kantrowitz: "Don't borrow more — for an entire college education — than the student's expected annual starting salary."
Also of interest: College aid — the rules for grandparents. >>
Sid Kirchheimer writes about consumer and health issues.