How to borrow for college: A basic primer

If they haven't already, millions of seniors graduating from high school will turn their attention over the next few weeks to paying for college.

Scholarships and grants -- which don't have to be paid back -- are the best option, of course. But not everyone has the academic record for merit aid, or a great jump shot that would earn a sports scholarship. About two-thirds of four-year college students who graduate do so with some debt -- typically about $19,000.

Many are confused by the patchwork of programs and options for borrowing and get stuck with more debt than they should. And this year, there's a new wrinkle: An investigation by New York Attorney General Andrew Cuomo has exposed questionable financial arrangements -- he calls them "kickbacks" -- involving lending companies and universities. Cuomo also has accused the Education Department of being asleep at the switch in regulating the $85 billion industry.

The whole situation has called into question whether the advice many students get is really unbiased. The Associated Press collected advice from published resources and some independent experts on borrowing for college. The Southeast Missourian has chimed in with advice from Karen Walker, director of financial aid services at Southeast Missouri State University.

In question-and-answer form, this is their advice.

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Q: Where should I look for a loan first?

A: That one's easy: Uncle Sam.

The federal government helps students borrow in several ways: through direct loans, by subsidizing interest payments, and by encouraging private lenders to lend to students. Which of these programs you qualify for depends on your school and level of need.

In virtually all cases, government loans are a better deal than private loans, so max them out before borrowing elsewhere. "The interest rates are better," Walker said.

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Q: How do I get started?

A: Fill out the FAFSA (Free Application for Federal Student Aid) form on the U.S. Department of Education Web site at www.fafsa.ed.gov. It's kind of a pain, but it's worth it. If you plan to attend next fall, and haven't yet filled out the FAFSA, you may have missed some deadlines for state aid or aid from your college. But it's not too late to get federal aid, Walker and other experts said. If you're planning for college further down the line, the Education Department's Web site has a new FAFSA calculator that will estimate what kind of federal aid you're eligible for.

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Q: What kind of loans will I be offered?

A: The chief federal loan program is the Stafford loan, which will let dependent freshmen borrow up to $3,500 next year (more for upperclassmen). For students with high financial need, the government pays interest on at least a portion of that while you're in school. But anyone -- regardless of family income -- can take out an unsubsidized Stafford, which still lets you defer payments until after graduation.

Depending on your school, you may be offered a Stafford directly from the government. Or you may take out a government-guaranteed Stafford loan that's provided by private lenders such as banks.

If you have high need, you may also be offered a Perkins loan. That's also subsidized by the government, and a great deal, with 5 percent interest and other favorable terms. But the borrowing limits are $4,000 per year for undergraduates.

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Q: I've borrowed what I can through these programs but it's not enough. What now?

A: Here's where it starts to get tricky.

One option is for your parents to borrow money for you, through a PLUS loan -- another government program. Parents can borrow up to the full cost of attendance (including room and board and books), and one advantage for parents is they can consolidate these loans later.

But there are big downsides for parents, too. The biggest is that parents -- not their children -- are on the hook. And many experts tell parents to fund their own retirement savings before taking out a loan to pay for college for their children. There are lots of ways for students to pay for college, but it's very hard to catch up on retirement savings, says Ivan Nalibotsky, a financial aid adviser with Capital Solutions Group in Bethesda, Md.

If you're a parent who wants to help your kids and need to borrow, Nalibotsky suggests considering a home equity loan -- then using the proceeds to pay for college. Factoring in the tax advantages, home equity loan rates may compare favorably with PLUS on private student loans.

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Q: My folks say I'm on my own. What now?

A: You may have to consider a private loan. Don't worry: you're in good company. Over the past decade, private borrowing for education has grown 10 times faster than borrowing from the government, and totaled about $16 billion last year. But Southeast's Walker said the university doesn't promote private loans, which have higher interest rates.

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Q: How should I choose a private loan, with all these conflicts of interest I've been reading about?

A. The recent controversies have raised questions about colleges' incentives to include certain lenders on preferred lists, but the experts agree they're still a good place to start.

Colleges generally put lenders on their list based on such factors as low rates, good service and clarity of their policies. It's good to use their expertise

Still, given the various student loan investigations, it's worth taking one more step: Ask a financial aid official the criteria for preferred lenders at your school (new federal measures in the works may make this information more transparent). If you see only one company listed, or are told the school has an arrangement with the lender that provides it indirect revenue, you may want to consider other lenders. Remember: You have the right to borrow from any lender you choose, not just those on the list.

That said, be careful, particularly if you venture off the list. Read the fine print. You might be offered a loan with a highly attractive introductory rate. But few students typically have the credit scores to be eligible for that rate, and it might balloon after a few years.

In considering any private loan, you'll probably be offered different kinds of incentives. Think carefully about which ones are most valuable to you.

Many private lenders will lower your rate for making, say, 44 consecutive on-time payments. Sounds great, but most students don't manage to do that, says Mark Kantrowitz, publisher of the Web site finaid.org. He advises choosing upfront discounts like reduced fees that you're sure to get.

You can compare loan offers on a number of Web sites, but Kantrowitz says the only way to find out exactly what terms you'll get is to apply. But don't apply to too many -- that could lower your credit rating.

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Q. Where can a prospective student or the student's family go for financial advice?

A. Contact the financial aid office at the university or universities you are considering attending, Walker said. Check the schools' Web sites to access the financial aid offices for information, she said. "The kids are the savy ones on the Internet and the parents are the ones worrying about how they are going to pay for college. They need to sit down together," Walker said.

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Q. How much should I borrow?

A. As little as you can. "Live like a student when you're in school so you don't have to live like a student after you graduate," Nalibotsky says. Walker agrees that it's best to borrow only what you truly need to pay for school.

The average loan debt of $19,000 is manageable for most people, and median debt levels have leveled off in recent years after sharp rises in the 1990s, according to the College Board. But excessive debts can hamstring you for decades, limiting your cash flow and career options. A common rule of thumb is don't take on more debt than your expected first-year salary.

Where it gets tricky is deciding whether to borrow a bit more so you can work less and attend school full-time. There's not easy answer there, but keep in mind at large schools, it takes most students longer than four years to graduate.

For many students, a part-time job and full course load is manageable, but a full-time job may impede progress to graduation. You're better off borrowing enough to focus on your studies than flunking out or staying in school forever.

Southeast Missourian staff writer Mark Bliss contributed to this story.

On the Net:

http://www.fafsa.ed.gov/

www.semo.edu

http://www.finaid.org

http://www.bankrate.com

http://www.simpletuition.com