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The College Cost Crunch

The Lowdown on Loans

For an increasing number of students, borrowing to help cover college costs is a fact of life. Loans now make up more than half of typical aid packages, according to the Center for Economic and Policy Research. Over the past decade debt levels for graduating seniors more than doubled, from $9,250 to $19,200, a 108 percent increase (58 percent after accounting for inflation), according to the Project on Student Debt, a nonprofit advocacy group. Parents are borrowing more too, via loans or even credit cards. What you need to know:

Try for federal loans first.

Government-backed loans typically offer better terms than private ones, including capped, fixed interest rates, extended repayment plans and less stringent approval requirements, says Mark Kantrowitz, publisher of FinAid.org, an online resource for financial aid. After you complete the FAFSA, your teen's school will send a letter indicating your eligibility for federal loans. There are three different types.

Perkins Loans These are subsidized loans made through participating schools to kids with exceptional financial need. They are the best student loans out there, with interest paid by the federal government while the child is enrolled in school. Each school has a limited pool of funds available. Max loan amount for undergrads: $15,000.

Stafford Loans (subsidized and unsubsidized): Subsidized Stafford loans are based on need, with interest paid by the government until your child leaves college. Unsubsidized Stafford loans are available to most students and begin accumulating interest charges as soon as money is disbursed. Max loan amount for undergrads: $20,000.

PLUS Loans They are the financial responsibility of the parent, not the student. They are not based on financial need, and a poor credit history can impact loan eligibility. Payback (including interest) begins 60 days after funds are disbursed. Max loan amount: Total cost of attending the school less any financial aid the student receives.

Shop for a lender.

Federal loans are available through colleges, private lenders, and some state guaranty agencies. The government sets the rates that can be charged, but some lenders discount those numbers to attract business (and hope to make up the shortfall with increased volume). Most schools provide a lender list as a service but will not offer specific recommendations, to avoid a conflict of interest. Your state guaranty agency can also help you locate a lender. To find your state guaranty agency, visit ed.gov/erod (click on State/Territory Search) or call 1-800-4-FED-AID. If federal loans are not enough to cover college expenses or you do not qualify for a parent PLUS loan, you or your child can take out private loans, which are often marketed by mail and on campuses. Private loans should be your last choice because, unlike federal ones, they have variable rates that are not capped by Uncle Sam. Interest also begins accumulating when funds are disbursed. If your child needs a private loan, make sure he has a cosigner to increase his chances of getting the best terms.

Watch the bottom line.

It's easy for students to get neck-deep in debt. As your teen evaluates school options and financial aid offers, remind her that loans have to be repaid, and let her know approximately what her loan payments will be after she graduates. For example, $20,000 in loans at 6.8% interest (the current rate for unsubsidized student Stafford loans) will cost $230 a month for 10 years. You can find calculator tools at FinAid.org and other college Web sites.