April 23, 2007 issue - Here's more bad news from the college-costs-a-fortune department: student loans have lost their bargain interest rates, and, according to a new investigation of lending practices in New York state, your school's financial-aid office may be steering families to unnecessarily expensive options - and taking a cut from banks in return. Some advice on shopping for the best deal now:
Accept whatever grants, scholarships and work-study programs your school will throw at you, but don't jump at the loans that are part of the package. You can always come back and sign up for them if you don't find anything better.
Try other sources. It may be cheaper and easier to use a home-equity line, a second mortgage or a loan from your 401(k).
Shop for the best federally backed Stafford (for students) and PLUS (for parents) college loans. You can compare costs at www.simpletuition.com.
Look for more lenders at www.finaid.org/loans/educationlenders.phtml. Shop for a loan that comes with discounts, like a rebate of your origination fees or rate cuts if you agree to make payments on time. Discounts for borrowers who build a three- or four-year record of paying on time are nice, but not worth as much as they seem because they are delayed.
Get tough. If your school offers a preferred list of lenders, ask if those lenders are offering the best possible rates and discounts, and ask if the school is being compensated for the preferred listing. Find out just how complicated it would be if you borrowed elsewhere.
Use private education loans as a last resort, and get a cosigner. A student without a credit history or a cosigner can pay 14 or 15 percent interest on a private loan, says Kevin Walker of Simple Tuition. If a parent with a good credit score cosigns the loan, the rate would be closer to 7.5 or 8 percent.
Rethink the bottom line. Students can use the loan calculators at finaid.org to estimate what their postgraduation payments will look like. If it's unreasonable ($100,000 debt on a $30,000 salary should give you pause), consider cheaper schools for the first two years, a year off to work, pushing hard to graduate early or even living home and commuting. You'll be able to afford your own place when you're done.
