How to Borrow Smart to Pay for College

The Squeeze

• There are two basic categories of student loans to consider: federal loans disbursed by the government and private loans disbursed by banks, financial institutions and credit unions. 
• Today’s federal loan programs now require borrowers to participate in entrance and exit counseling so they are clear on the terms of the debt. 

Paying for college will likely be your kid's first big financial commitment — made before he truly understands how long it will take to pay it back or how much it will cost overall, no matter how many times you might try to explain. 

Today, people ages 24 and younger hold a whopping $115.50 billion in student loan debt, according to the Department of Education. When it comes to paying for tuition, room and board, books and transportation, student loans are hard to avoid. But before your son signs his first promissory note, take a step back to consider whether this particular loan is right for him, you and your family as a whole — and whether you’ve exhausted all other potential sources of funding.

To that end, if you have received financial aid packages from your child’s prospective schools, consider whether to appeal for additional consideration for grants. In the meantime, your child's high school counselor can point them in the direction of outside scholarships they can apply for as well, although truth be told, these tend to be small.

Only after you’ve put all those financial ducks in a row is it time to consider loans. Here’s what you and your child need to know to borrow smart for college. 

Federal student loans

The student must first fill out a Free Application for Federal Student Aid, known as FAFSA, to apply for a federal loan. All college hopefuls (and, let's face it, their parents are hopefuls, too) are encouraged to complete this before beginning the application process. Federal student loans are awarded to your kid when they receive their financial aid package, following a college acceptance. These loans usually don't require a cosigner or good credit. Congress determines what the interest rate on these loans will be each year, but they typically have low-interest rates that are fixed. So once you sign on the dotted line, the rates are locked in for as long as you have them. 

There are three basic types of federal loans:

Subsidized 

Students with demonstrated financial need are eligible for subsidized loans up to certain limits that depend on grade level and dependency status. The benefit is that the federal government assumes the interest costs while the student is in school either part-time or full-time and during a 6-month grace period after leaving.

Unsubsidized 

All eligible students, regardless of financial need, can get an unsubsidized loan. With these types of loans, the borrower is responsible for all interest accrued for the life of the loan — even if you defer payments for any reason. If you don't pay the interest while your child is in school, it is added to the amount borrowed when payments start, which increases the balance and the monthly payments later on.

PLUS loans

It’s likely possible for you as the parent of a college student to borrow funds through the Parent PLUS loan program offered through the U.S. Department of Education. These loans have no set limits on how much you can borrow. However, the amount can't surpass the outstanding education expenses after all other forms of aid have been factored into the cost of attendance. There is a loan fee, which is a percentage of the loan amount.

Private student loans

Another avenue to consider is private loans. Banks, credit unions, and financial companies all offer various private loans to students and their parents. These loans require an application and a good credit score, and parents usually co-sign these with their kids. You can opt for either a fixed or variable interest rate, which is a lot riskier because it depends on the market. And remember: No matter what happens once your kid graduates, you're both on the hook for this loan. 

It’s payback time

Unlike back in our day when graduates were essentially on their own to figure out how to pay back — let alone consolidate — their student loans, today’s federal loan programs now require borrowers to participate in something called entrance (and later, exit) counseling. These sessions explain the terms and conditions of the loan and clarify your rights and responsibilities as a borrower.

As with any borrowing, it’s always good to think about how you plan to pay it back, which makes the federal Public Service Loan Forgiveness program an important option to consider from the start. If your child makes 120 eligible monthly payments while working for a qualifying employer — like state, tribal or federal governments, a nonprofit with tax-exempt status, AmeriCorps, or the Peace Corps — the program will forgive the remaining balance.

And for those who don’t qualify for loan forgiveness, consolidation and refinancing will likely be a great next step, if only to get a lower interest rate.