March 3, 2008 issue

Cash-strapped parents are filling out their aid forms in the face of higher college costs, a credit crunch and new student-loan legislation from Washington. TIP SHEET’s Linda Stern asked Mark Kantrowitz, publisher of FinAid.org, how you can get the most cash for your kids.

STERN: Will there be college money for next year’s freshmen? How much will it cost?
KANTROWITZ: There will be fewer lenders, but students will still be able to obtain federal education loans. Undergraduate federal student loans will cost 6 percent if they are subsidized, 6.8 percent if they are unsubsidized, and parents’ loans will cost as much as 8.5 percent.

Those rates all seem pretty pricey. Shouldn’t families just get a home-equity line instead?
Remember that these are fixed rates, and home-equity rates will vary, so over the long term they may go up higher. And student loans have some other favorable terms like hardship deferments and extended repayment plans. But, if you think you can pay it off over the next couple of years, I’d recommend the home- equity line.

Do you have any strategic tips for families?
Students should apply to a “financial-aid safety school”—a college where the student has a very good chance of admission and where they could afford to attend even if they got no financial aid. If you’ve been saving money in a child’s name, you could liquidate that account and use that to invest in a 529 education savings plan, and you’d be in a better position to get more aid. We have a whole list of suggestions for maximizing aid eligibility on our Web site (finaid.org/ fafsa/maximize.html).

Should families fill gaps with private loans?
Private loans should be considered only as a last resort. If you must, borrow with a cosigner with a better credit score, and focus on loans that are pegged to the LIBOR index (instead of the prime rate). They should have lower rates going forward.

What should students do with the loans they already have?
If you only have fixed-rate loans, don’t consolidate them; you’ll give up good discounts. If you have variable-rate loans, wait until July 1, 2008, to consolidate those loans, because rates will be about 3 percentage points lower by then.

How, and when, should families evaluate the cost of college?
After you are admitted, it is time to look at the dollars, see what you can afford and evaluate whether the higher out-of-pocket cost of your dream college is worthwhile. Evaluate college costs by considering the out-of pocket cost after gift aid. The higher the out-of-pocket cost, the more the family will need to borrow. Having less (or even no) debt is better for a variety of reasons: it reduces stress, increases the graduation rate and expands your options after you graduate. Undergraduate students who graduate with no debt are three times as likely to go to graduate school as undergraduate students who graduate with debt.