Federal student loans: How to get one -- Page 2

"There was no new money put into it for this academic year by the federal government," he says. "We normally got about $80,000 and had to match about a third of that. We got zero dollars from the government for 2005-2006."

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Parent loans
If you're adding up the amount of money students can borrow and thinking it doesn't come close to covering the cost of tuition at your student's school, you're probably right.

"The problem with the Stafford loan is the loan limits," says Marvin Carmichael, director of student financial aid at Clemson University in Clemson, S.C. "It doesn't even come close to addressing the $8,800 tuition at Clemson. It's creating tremendous hardships for students. Congress has been unwilling to increase the loan limits to get back to the philosophy of making college affordable through a single source. It pushes families into different loan environments, some of which are more desirable than others. There's a greater risk of default when families have multiple loans to repay."

Many families turn to the PLUS loan to make up the difference. This loan is for parents, and covers the entire cost of college, minus any other financial aid the student receives.

It's easy to apply for, with liberal credit requirements and no prepayment penalties, says Brian Greenberg, a New Jersey-based certified college financial planning specialist. The variable interest rate loan is capped at 9 percent; the current rate is 6.1 percent. Call the financial aid office at your student's school for information on applying for a PLUS loan.

Borrowers can take up to 10 years to repay the loan, with the chance to consolidate loans for up to 30 years. Plus, payments can be deferred for three years in cases of economic hardship and if the borrower or the student dies or the borrower is permanently disabled, the loan is forgiven in full. Unlike student loans, however, PLUS loan borrowers need to start making payments immediately.

If you're interested in the loan, but think you don't have good enough credit to qualify, apply anyway. You might be pleasantly surprised, Helgeson says. The loan guidelines don't look at debt-to-income ratios and "FICO scores are not mentioned in the regulations." Besides, if you are turned down, your student automatically gets the extra $4,000 to $5,000 in unsubsidized Stafford loans.

Getting started
The starting point for applying for student loans, as well as any other federal aid, is the Free Application for Federal Student Aid, universally referred to by financial aid professionals as FAFSA. It will tell you what your family will be expected to contribute to the cost of the student's education, based on your income, assets, and other obligations. It can be filled out online at the Department of Education's financial aid Web site. The form requires information from the previous year's income tax return, so you'll want to have that handy.

The biggest mistake that families make in regard to financial aid is thinking they're not eligible and not applying, says Madelene Aponte, director of student financial services at Mercy College in New York.

"Many families think their incomes are too high, but they actually are eligible for aid," she says. "If you have family income of $100,000 with four to five people in the household, you might qualify for a subsidized loan. If they're borrowing for all four years, taking full-time class loads all four years, they're looking at $17,000 in loans. You're not paying any interest while you're enrolled at least half time, that's a substantial savings. If they go on to graduate school, that can tack on two to three years that can be deferred and interest that can be paid by federal government. If they don't file a FAFSA, they can't get that."

LeSueur says filling out the FAFSA is especially important for families with more than one child in college. "The expected family contribution is split between children," she says. "The gold mine for middle class families is multiple children. Twins have it made."

Financial aid professionals point out that borrowing money for college, whether it's from the federal government or from a home equity line, shouldn't be viewed as a negative. While it's a significant expense, it's paving the way for future success.

"It's an investment in themselves," Helgeson says. "They can't repossess your mind as far as I know."