Students who need to borrow money should start by seeking out Stafford loans -- the subsidized variety (if they qualify) or unsubsidized loans. Subsidized loans are generally awarded to students in greater need; the interest is paid by the federal government while students are in school. With unsubsidized Stafford loans, interest accrues from the date the loan is disbursed.
Stafford loans issued since July 1, 2006, feature a fixed rate of 6.8 percent. The new Congress announced it would like to halve that rate and has placed the reduction of student loan debt as a high priority on its "New Direction for America" agenda.
But right now it looks like the proposed rate of 3.4 percent will only apply to subsidized Stafford loans and will be gradually phased in over five years. Of course, legislation tends to transmogrify by the time everyone agrees on all the fine points, so it's too early to predict how things will shake out.
To be eligible for Stafford loans, students do not need to have collateral or a credit history. But they (or their parents) do need to have filled out FAFSA forms to get these federal loans. Loan limits increased for the 2007-2008 academic year: Dependent freshman students may now borrow up to $3,500; sophomores may borrow $4,500. All other dependent undergrads may borrow up to $5,500 a year. Total Stafford loan debt for undergraduate students may not exceed $23,000.
Parents can get in debt, too
This limit means students are often scavenging for other sources of money. Parents can make up the difference by taking out a PLUS loan -- the acronym stands for Parent Loan for Undergraduate Students. In fact, this is the fastest growing aid program over the past decade, rising at an annual 12.5 percent rate after inflation. In the 2005-06 academic year, 820,000 parents took out PLUS loans, borrowing nearly $10,000 each on average.Parents have to meet certain credit requirements and they're on the hook for this loan, regardless of any private agreements made with their children. So this is a decision that needs to be carefully thought out. For PLUS loans issued since July 1 of last year, the interest rate is fixed at 8.5 percent (unless they originate from the direct loan program, in which case the rate is 7.9 percent). Loans issued before July 1, 2006, feature a variable rate, which is reset annually. Congress is also targeting more favorable rates for PLUS loans, but no action is expected until later in the year, if then.
The parent loan is somewhat of a misnomer since graduate students can now directly apply for PLUS loans. In addition, graduate students can tap up to $20,500 a year in Stafford loan proceeds.
Loans of last resort
Those who are truly desperate may consider borrowing from private lenders. But students who heed advertising that promises easy money ("No need to fill out the FAFSA!") will do themselves a huge disservice if they blow off federal loans in favor of private money.