Snag cheaper-than-ever government loans
That said, the bulk of financial aid comes in the form of loans, which have to be repaid, so the big question for students going to college isn't whether or not to borrow, but how to borrow wisely.The best way to borrow wisely is to borrow from the government.
Federal loans aren't only cheaper than private deals, they offer greater protections in avoiding huge debts. That's especially true this year, because lawmakers have passed reforms to keep government loans affordable.
Remember that federal deals like the so-called Stafford loans, designed for undergrads, or PLUS loans, created for families and grad students, come with fixed interest rates, so you know they won't skyrocket in the future. That's not always the case with private loans, says Peter Mazareas, treasurer for the College Savings Foundation.
"The federal loans have much better rates and they're fixed," Mazareas says. "So families should lock in now during this low-interest environment."
Government loans are getting cheaper. Consider interest rates on Stafford loans, which are reset annually and are taken out by students. Stafford loan interest rates are currently at 6.8 percent. They're due to drop to 6 percent July 1, 2008, and in coming years, Staffords will get even cheaper, until interest hits a low of 3.4 percent in 2011. In 2012, they'll revert back to 6.8 percent unless Congress intervenes again.
PLUS loans, available to parents as well as to graduate students, also have current fixed rates of either 7.9 percent or 8.5 percent.
Get added protections for government loan debt
There's additional good news for those who borrow from Uncle Sam. The College Cost Reduction and Access Act, which was signed into law in September, has a slew of provisions to protect borrowers once they begin repaying their government loans.Most notably, the law has put a cap on debt limits, so borrowers don't have to devote more than 15 percent of their income to repay Stafford and Perkins loans, and PLUS loans for graduate students. This new protection applies regardless of when these loans were taken. Caps are set on a sliding scale based on an individual's income. In practice, most borrowers will "not have to spend more than 10 percent of their income" on loan repayments, says Shireman.
What's more, the new law includes a loan forgiveness feature that guarantees borrowers won't be stuck with loans for the rest of their lives. Specifically, unpaid loan balances are forgiven after 10 years for those who teach, serve in the military, work as librarians, nurses or in other public-sector, nonprofit jobs for at least 10 years. For borrowers in other professions, outstanding balances on loans are forgiven after 25 years.
"It makes sure there's an endpoint so people aren't in a situation where debt continues into Social Security years," says Shireman.
replacecontent-tcm:8-21296
Be wary of private loans
It's worth noting that the repayment protections don't apply to private loans. That's not to say they didn't receive congressional attention, however. Private loans now make up nearly a quarter (24 percent) of all education loans, up from just 6 percent a decade ago, according to the College Board.Critics maintain that the boom has come at great cost to borrowers, who don't receive adequate information about how their loans are structured. Others have maintained that private lenders make deals with universities to get on colleges' "preferred lender" lists.