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What are some loan options to fund my child's education?

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Student Loan OptionsThere has been a great deal written about rising student loan debt. According to the Institute for Student Access and Success, the average student debt in 2011 was $26,600. In 2010, it was reported that the average debt parents were taking on to support their students was approaching $35,000. Thus, one could argue that the real debt per family for four years of college is now averaging more than $60,000.

I do not recommend taking on excessive loan debt. The following ten loan options, when used wisely, can make it possible to take on manageable debt to help you pay for college.

The Perkins Loan – This is a highly attractive student loan, made available to students only through their college of choice. These loan resources are limited and colleges typically offer them to the neediest families. No interest accrues on the loan while the student is in college—the interest, at 5%, starts to accrue 9 months after graduation. The standard repayment program for the Perkins loan is 10 years.

The Subsidized Direct loan (formerly called Stafford) – The subsidized direct loan is a student loan, not a parent loan, and it is written in the student’s name. Parents have no legal responsibility to repay the loan; the student signs the promissory note. The maximum eligibility for the subsidized direct loan for dependent students is $3,500 in freshman year, $4,500 in sophomore year, and $5,500 in each of junior and senior years. The current interest rate on the subsidized direct loan is 3.4%. To be eligible, the family must have an unmet need. If this unmet need is equal to or greater than $3,500, the maximum can be obtained. Need is defined as (Cost of Attendance) – (EFC) = Need. Unmet need exists when combined grants, scholarships, and work study programs do not fully meet the student’s financial need.

The Unsubsidized Direct loan – The unsubsidized direct loan ensures that all students, regardless of their families’ income and assets, will be able to borrow money to pay for college. The maximum amount of the subsidized and unsubsidized loans together equals $5,500 in freshman year, $6,500 in sophomore year, and $7,500 in each of junior and senior years. If the student is not eligible for any portion of their loan as subsidized, then all of it—up to the maximums noted—would be unsubsidized. If the student qualifies for the maximum amounts of both kinds of loans, then only $2,000 of their total direct loan package would be unsubsidized. Interest on an unsubsidized loan accrues immediately at a 6.8% rate. Subsidized and unsubsidized direct loans have several repayment options, but the standard repayment option begins 6 months after graduation and lasts for 10 years.

Refinancing Your Home – If you have a significant amount of equity in your home, you might want to refinance the entire loan, hopefully at a lower interest rate, and borrow a lump sum beyond the mortgage payoff amount. After the mortgage is paid off, you can then access that lump sum and use it as a college fund. Interest on loans against the home are very low today and (in most cases) provide a tax benefit.

Taking a Home Equity Loan – Instead of refinancing a single loan at a larger amount, you could take on a second loan against your home. This would be a new loan with its own terms. Of course, the idea would be to use the money from that second loan as a college fund.

The Home Equity Line of Credit (HELOC) – In this arrangement, you establish an amount up to a certain maximum, based on the equity you have in your home, that is available to you to borrow if you need to. This loan is designed like a checkbook, where you can write a check to the college when needed. The amount you expend from the line of credit then accrues interest. It is not uncommon to pay interest only to the lender on the amount expended, keeping the payments low while your student is in college. When the line of credit, which is often established for 5 years, expires, you can then pay down the principle.

401k/403b Borrowing – Although borrowing against retirement plan programs could have program-specific rules, the general standard is that you can borrow up to 50% of the value of the account, or $50,000 (whichever is lower).

You are then obligated to pay your own account back—on both principal and interest—during a 5-year period. It is important to recognize that you are repaying yourself and replenishing your own account with interest. All of this, if done correctly, can be done with no tax or premature withdrawal penalties.

Alternative Student Loan – This is not a federal loan program. These loans are designed by private lenders and allow students to borrow money and postpone repayment until after graduation. Although these are generally student loans, they typically demand a cosigner. If the parent is the cosigner, they become legally obligated to repay the loan if the student is unable or unwilling to do so after graduation.

The Parent Loan to Undergraduate Students (PLUS) – This parent loan, offered to most families, is a federal program that allows parents to borrow money on behalf of their child(ren) for college. The amount borrowed cannot exceed the difference between the Cost of Attendance and any amount available in grants and scholarships.

The PLUS has a fixed interest rate of 7.9% and a standard repayment program of 10 years. It is important to note that the PLUS repayment begins right away. Although it is not naturally deferred, a deferred payment option can be secured.

Loans Made Available Through the College – Colleges that offer their own college loans are rare. The terms of such loans vary and are dependent upon the particular college.

At College Countdown, we are convinced that there are affordable college options for every family. Check out the Financial Fit Program on College Countdown to learn more about the 10 loan options and see how you can find the right college at a price your family can afford.

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Frank Palmasani is a Chicago area high school guidance counselor and former college director of admissions, and creator of Financial Fit. In 1985, Palmasani began delivering seminars on the college financial aid and planning process, and estimates that he has reached more than 200,000 people through his talks. He is a member of NACAC, IACAC, and the College Board. Palmasani has been featured in the Boston Herald, the Chicago Tribune, Yahoo! Finance, WGN-TV, WTTW-TV, CBS’s Monsters and Money in the Morning, and is the author of the forthcoming book Right College, Right Price (Sourcebooks, January 2013).

Palmasani is the founder of Financial Fit, which you can find in the College Countdown bookstore.