Deciding where to go to college can seem like making a deal with the devil these days.

You can obtain a premium education at one of the top schools in the world, but there’s one tiny catch: You just have to give up your firstborn child and two appendages of your choice. Or live in debt — forever! (Cue evil laughter.)

Gary Carpenter, CPA, executive director of the National College Advocacy Group, says students should have an idea of how they’re going to pay their loans back before they ever set foot on campus. And that means if your chosen profession might have you eating beans and ramen noodles into your 40s, the expensive private school might not be the right place to go.

At the same time, thanks to some important changes in student loan rules and regulations, students will likely have more latitude in their school choice because they’ll have help in their struggle to repay daunting college debts.

For instance, beginning in 2009, a new program called Income-Based Repayment offers some relief.

Lauren Asher, vice president for The Institute for College Access and Success, was part of the group that worked to develop the underlying policy proposal that resulted in this program.

She says that in addition to assuring individuals that their loan payments won’t put them in the poorhouse, this program will help when you’re deciding whether you can afford to go to a particular college.

“It’s impossible to predict the future and know what you’re going to earn and what you can afford to repay,” she says.

Head of the class
The combination of new laws, smart borrowing decisions and money-saving techniques can help students graduate from their college of choice.
Graduating with manageable debt
  1. Avoid unnecessary debt
  2. Smart borrowing
  3. Help from lawmakers
  4. Assistance for parents
  5. >The IRS helps, too
  6. Ways to shave costs

Avoid unnecessary debt

The ever-growing expense of a higher education has been well documented, but college degrees are not a luxury in this day and age; they’re a necessity. On the other hand, it’s important for students to be practical about what they’re getting from the deal.

A recent study from PayScale found that graduates from Ivy League schools make more money than their plebian counterparts. But don’t assume that going to an expensive school automatically guarantees a big salary.

“Case in point,” says Carpenter: “I had a student who was going to a private school in upstate New York and she was studying to be a social worker. She was going to incur about $80,000 worth of debt and when she got out of school, she was going to be hired by the state of New York and get a job that would probably pay about $35,000.”

By going to a public university with the same program, the student was able to cut about $50,000 off her college bill.

“She was going to be burdened with a large monthly payment that would prohibit her from buying a house, maybe even a car. So her option was to go to a large state university and graduate with about $30,000 in debt versus $80,000,” he says.

Smart borrowing

The best way to borrow for college is through the federal government via loan programs that are backed by the U.S. Treasury.

Stafford loans are available through one of two programs, chosen by the schools. One is the William D. Ford Federal Direct Loan program, in which students borrow money directly from the U.S. Department of Education.

The other is called the Federal Family Education Loan program or the FFEL, in which commercial lenders participate. “But that commercial lender has to follow all of the terms and conditions that are outlined in the law. So these are almost identical,” Carpenter says.

The main difference between FFEL and the direct loan program concerns the Parent Loans for Undergraduate Students, also known as PLUS loans. The fixed interest rate for PLUS loans obtained through the direct loan program is 7.9 percent, but it’s 8.5 percent through FFEL. “It is a quirk that happened in the law about two years ago, and they have not changed it since,” says Carpenter.

Stafford loans come in two categories based on need: subsidized and unsubsidized. With the subsidized version, the interest is paid by the federal government while the student is in school. Students with more financial means get unsubsidized loans that accrue interest while they are in school.

There isn’t an absolute income cutoff to qualify for the subsidized Stafford loan, but it’s for people with lower incomes relative to their college cost, Asher says.

Perkins loans are another low-cost option, but few students qualify for them. These loans are made through the school and are limited by the amount of money the school receives each year. They are distributed to students on the basis of need as determined by their Free Application for Federal Student Aid, or FAFSA, forms.

Help from lawmakers

Recent legislation offers assistance to students and families struggling to finance their college educations.

In response to the urelenting growth in college expenses, the College Cost Reduction and Access Act of 2007 was signed into law.

Among its provisions, the act:
  • Increases funding for the Pell Grant through 2017 and increases the maximum available to students.
  • Cuts the interest rate on subsidized Stafford loans to 3.4 percent over a period of four years.
  • Introduces income-based repayment for federal student loans, effective in July 2009.
  • Establishes a new public service loan-forgiveness program.

Asher says the income-based repayment provision is designed to alleviate the struggle that many college graduates feel, particularly those with high debt relative to their income. These students “who may be struggling to make their loan payment can get an assurance of making their loan payment and a light at the end of the tunnel,” says Asher.

Income-based repayment will be available to everyone with a federal student loan — past, present and future borrowers. The program does, however, exclude PLUS loans.

Generally, federal loan payments will be limited to 10 percent of the borrower’s discretionary income, or a little bit above 10 percent for people making higher incomes, with a cap at 15 percent.

According to, households making less than 150 percent of the poverty level for their family size will not have to make a loan repayment at all. For example, a family of two earning $20,000 per year would not be required to make payments. On the other end of the income spectrum, a family of two earning $100,000 annually would make a payment equal to 11.9 percent of their income.

After 25 years of payments, these loans will be automatically forgiven.

The public service loan forgiveness program will forgive the debt of federal student loan borrowers holding certain kinds of jobs after making payments for 10 years. Eligible jobs include those with nonprofit organizations and government jobs at the federal, state or local levels, among others. These rules will be finalized by November 2008.

There is one catch to this program: Your school must be in the direct loan program.

“To benefit from the public service loan forgiveness program, you need to be in one of three types of payment plans, and they are only in the direct loan program. So you have to be in the right kind of job and making the right kind of loan repayments at the same time,” says Asher.

However, the new law opens a loophole for students in the FFEL program. Asher says that a change made July 1, 2008, entitles graduates who had already consolidated their loans through an FFEL lender to reconsolidate. “You can reconsolidate into the direct loan program to access public service loan forgiveness,” she says. In response to the urelenting growth in college expenses, the College Cost Reduction and Access Act of 2007 was signed into law.

That was not the end of the beneficence bestowed upon the populace by Congress and the president. Lenders had begun bailing out of the private student loan business due to the spreading credit crisis. To mitigate the student loan credit crunch, in May lawmakers passed the Ensuring Continued Access to Student Loans Act of 2008.

This law increased the Stafford loan limit to $31,000 total, increasing the amount that students can borrow each year by $2,000.

“Before the law went into effect it was $3,500 for a freshman, $4,500 for a sophomore and $5,500 for junior and senior year,” says Carpenter. “Now, freshmen can get $5,500, $6,500 for sophomores and $7,500 for juniors and seniors.”

“But the $2,000 increase is always an unsubsidized Stafford loan,” says Carpenter.

Even if the student has a subsidized Stafford loan, the portion above the former limits will be counted as unsubsidized.

Assistance for parents

Congress also offered a lifeline to parents.

Previously, PLUS loan repayments would begin 60 days after the final disbursement went to the school. But with the Ensuring Continued Access to Student Loans Act of 2008, parents have two new payment options.

  • Parents can:
  • Elect to pay only the interest on the loan, due quarterly, while the student is in school.
  • Defer the payments on the principal and interest until the student is out of school.

“The changes were made because so many people were having problems paying their mortgages and meeting monthly obligations,” says Carpenter.

The law also makes it easier for parents with challenged credit to get PLUS loans.

Formerly, if you were past due on any loan more than 60 days, you wouldn’t qualify for a PLUS loan, says Carpenter.

The following delinquencies will not count against parents who apply for PLUS loans for years 2007 through 2009.

  • Lenders will turn a blind eye to:
  • Loans overdue on a primary residence by less than 180 days.
  • Loans overdue on medical bills less than 80 days.
  • Any other bills that are past due less than 90 days.

The IRS helps, too

Tax credits won’t directly impact the cost of tuition and the pain of writing out gigantic checks every semester, but they will help families keep more money in their pockets and less in government coffers. These tax credits have been in place for several years.

  • Two tax credits:
  • Hope credit.
  • Lifetime Learning credit.

The Hope credit gives families a maximum of $1,800 for the first two years of the student’s education and is applicable for every child in the family.

Parents’ joint modified adjusted gross income cannot exceed $116,000 to qualify for the Hope credit.

But, if it does, the family can still possibly claim the credit, says Rick Darvis, CPA, Certified College Planning

Specialist and co-founder and director of the National Institute of Certified College Planners in Syracuse, N.Y.

“They can remove the child from the tax return and now the child can claim that credit. It can offset any tax liability that the child might have, so it’s basically not lost to the family,” he says.

The Lifetime Learning credit gives families a credit of up to $2,000 every year that the student takes one or more courses to acquire or improve job skills. Expenses for graduate-level work are eligible as well.

“It’s calculated by taking 20 percent of the tuition paid,” says Darvis. “If the tuition is $8,000, take 20 percent and it comes to a $1,600 Lifetime learning credit — if it is $20,000, then it will be the full $2,000.”

Other ways to shave costs

Both Darvis and Carpenter agree that going to a community college for the first two years of undergraduate education can be a major cost cutter.

As long as the school is accredited and the credits are accepted by the university you wish to transfer to, you’ll have the big-name school on your diploma for a fraction of the cost.

“I think that’s becoming a big trend. Or students are maybe going to a bigger school or a private college and taking classes at night for cheaper credits,” says Darvis.

“You’re also going to see a big boom in distance learning or CLEP programs,” he says.

College level examination programs, or CLEP, allow students to take tests on basic subjects offered in introductory courses at the college level. Depending on your school’s policy on CLEP credits, you could move on to more challenging subjects more quickly and even graduate ahead of time.

“I think one of the big problems students have is that they don’t sit down and do the process of figuring out how much they’re going to earn and how much they should borrow,” says Carpenter. “They just say, ‘I’m going to get the money, go to school and make enough money so that I can pay these loans back.’ And that’s not always the case.”

New initiatives from the federal government are a good step toward leveling the college playing field for everyone. Students should not have to mortgage their lives to merely achieve what is expected.

And while going to a more expensive school is a debatable advantage depending on the chosen field, all students should have the option of getting the best education possible.