With other types of student loans, the student doesn't need to pay interest while in school, but the interest accrues. At the same interest rate, $3,500 borrowed for freshman year would grow to more than $4,300 by graduation.
The amount a student can get in subsidized Stafford loans varies based on how close she is to graduation. The maximum is $3,500 for freshmen; $4,500 for sophomores; and $5,500 a year for juniors and seniors.
Apply at the Free Application for Federal Student Aid website, at www.fafsa.ed.gov. (Don't be confused by the similarly named fafsa.com, which charges for the application. The Free Application for Federal Student Aid is free.)
Don't qualify for subsidized loans? Need more money? The next-best bet is the unsubsidized Stafford loan, which is issued at a 6.8% fixed rate.
Freshmen can borrow up to $5,500; sophomores are capped at $6,500; and juniors and seniors at $7,500. Those maximum amounts include any loans that the student has taken from the subsidized version of the program.
The downside of unsubsidized Stafford loans: Interest accrues while the student is in school, so a student who borrows $5,000 to pay freshman tuition would owe $5,340 at the start of sophomore year, $5,703 at the start of junior year, $6,091 at the start of senior year and roughly $6,500 soon after graduation. That's simply the effect of the accrued interest.
If Stafford loans are not sufficient to handle the college funding shortfall, parents might want to consider PLUS loans, which are issued at an 8.25% fixed rate.
A last-ditch option is private loans, which are generally issued at variable rates that hinge on the student's and parent's credit ratings. In many cases, fees for private loans range from 2% to 10%, and rates can be as high as 20%.
Parents can borrow up to the entire cost of college with PLUS and private loans, but it's expensive debt and the interest accrues while your children are in school. By the time they graduate, they (and you) can end up owing twice as much as what was borrowed.
O'Shaughnessy says she'd consider a home equity line of credit before a private loan, and maybe even before a PLUS loan, because it's currently far cheaper than either of the other options. The down side: Home equity lines are typically variable-rate loans. If interest rates rise, the cost of your loan will too -- and your house is on the line if you have trouble paying back the debt.
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