BEFORE
YOU BORROW
With college planning, as with SATs and final
exams, preparation is everything. Take these steps before taking
out loans.
• FACTOR PRICE INTO THE DECISION
It sounds obvious: Every dollar less that a school costs you is
one dollar less that your family has to borrow. Yet scores of
debt-laden grads have the same sorry tale to tell about how they
got into this mess—they chose to go to the best school that
accepted them, regardless of price, and figured they'd work out
how to pay for it somehow. Don't let your kid become one of them.
Instead, make sure the schools she applies to
represent a good cross section, varying in price as well as academic
rating. That means putting a few good in-state and out-of-state
public colleges on the list. And look for other ways to keep costs
down. Encourage your child to apply to at least one school where
her SAT scores and grades will be relatively high, giving her
a better shot at merit aid (to see how generous a school can be,
go to its profile at collegeboard.com and find its typical "non-need-based"
award). Or she could start off at a lower-cost college and, if
her grades are good enough, transfer midway to the pricier school
of her dreams.
When Chad Sinclair, 20, realized he'd have to
borrow $23,000 to finance his sophomore year at the University
of Maryland, he instead spent a semester at Indiana's DePauw University,
where he'd qualified for big grants that cut his loan to $2,500.
After lobbying Maryland for more aid, he returned to the school
the following semester, bringing his less expensive DePauw credits
with him.
• SET SOME LIMITS A $10,000 loan
to pay for your child's freshman year may seem manageable. But
put that loan in context: Your child will be in school for at
least four years, tuition will undoubtedly rise, and you may have
one or two younger kids headed for college as well. Remember,
you've got a life too. "Don't sacrifice your retirement to
borrow for your kids' education," says Rick Darvis, co-founder
of the National Institute of Certified College Planners. "You
can't borrow for your retirement."
So pace yourself. Get a handle on how much college
debt you can realistically afford at FinAid (finaid.org/calculators).
Or consult a financial planner who specializes in college financing
(for referrals, go to niccp.com). Help your child to be similarly
hard-nosed about how much debt she can handle. If she's going
to borrow more than her starting salary is likely to be, you know
she's headed for trouble. Says Paula Luff, director of financial
aid at DePaul University in Chicago: "An aspiring social
worker shouldn't take on $50,000 in debt."
•
LET YOUR CHILD BORROW FIRST Even if you intend to foot the
bill for loans yourself, your child should borrow in his own name
first (you can always help with the payments later). The reason
is simple: Federally guaranteed student loans are the cheapest
higher education loans around. The most common kind is a Stafford
Loan, available to all borrowers regardless of income, with a
current maximum fixed rate of 6.8%. Your child can currently borrow
up to $2,625 his freshman year under the Stafford program, a maximum
that rises to $5,500 when he's a junior (or a total of $23,000
over five years as an undergraduate).
Unless the school your child attends dispenses
Stafford Loans directly, shop among lenders for the best deal.
Discounts generally come in two varieties: up-front breaks, such
as waived initial fees, and those your child has to earn, such
as interest-rate reductions for maintaining on-time payments.
If your child is the type who can't remember Tuesday morning where
he left the car keys Monday night, he's probably better off with
a lender that offers discounts with no conditions; college lender
MyRichUncle (myrichuncle.com), for example, recently cut its postgraduation
rate to a no-strings 5.8%.
• GIVE YOURSELF A PLUS Need more
money than you can get from a Stafford? Your next best bet is
probably a federal loan for parents, known as a PLUS loan. Depending
on the school, you'll be charged either 7.9% or 8.5%, plus up-front
fees, and you can borrow as much as you need to fill in gaps in
financial aid. And like Staffords, PLUS loans have fixed rates,
which protects you against rising interest rates. By contrast,
private education loans, which can be taken out by student or
parent, typically have variable rates, and those can range widely
depending on the credit rating of the borrower. Advertised rates
often sound competitive with PLUS loans but in practice can go
up to 12% or even higher.
If you've built up substantial equity in your
home, you might also consider a home-equity line of credit. With
rates recently averaging 8.2%, HELOCs are competitive with PLUS
loans; both also allow you to deduct at least some of the interest
you pay. But rates on a HELOC are variable, so your payments could
rise sharply if interest rates generally increase. And of course,
you're putting your home at risk. Proceed with caution.
