CORRECTED-Stern Advice-Good student debt, bad student debt

Wed May 9, 2012 8:29pm BST

(Corrects paragraph 15 to "you're more likely to get the lowest rate" if you meet certain criteria instead of "you have to")

By Linda Stern

WASHINGTON May 9 (Reuters) - It wasn't that long ago that high school seniors and their parents met astronomical college loans with a shrug and a signature: Whatever it took to send junior to his "first choice" school was a small price to pay.

Now, opinion seems to have moved 180 degrees in the opposite direction. With total student loan indebtedness topping $1 trillion and outpacing total credit card or auto loan debt, many are talking about the "bubble" in college financing. Any loan is a bad loan and students who take them out will soon be trapped in interest-impoverished lifestyles, goes the new argument.

Neither view is completely correct.

Borrowing crazy amounts of cash at high interest rates to fund a low-earning career may be questionable. But borrowing a reasonable amount to get a college degree - still an appreciating asset and a great investment - is a much better use of credit than many things you can borrow money to buy.

There are good and bad ways to borrow money for college. Of course, one family's 'crazy' is another's 'reasonable.'

Opinions about student borrowing vary wildly. These are mine.

GOOD LOANS - FEDERAL STAFFORD

Federal Stafford loans are the best student loans you can get. If your income is low enough to qualify you for subsidized loans, your rate now will be 3.4 percent and the Federal government will pay your interest until after you graduate.

That rate is scheduled to go up to 6.8 percent on July 1 for the 2012-2013 school year, but it's unlikely that President Obama and a Congress facing re-election will allow that to happen. Unsubsidized Staffords already are at 6.8 percent.

Stafford loans are the best student loans for most middle-class families, because there are many lenient repayment options. Graduates who move into low-paying fields can make low monthly payments, and eventually eliminate the loans altogether if they stay in low-paying fields. Even grads in high-paying fields can stretch out the loans if they want to.

BAD LOANS - BIG ONES FOR OVERPRICED SCHOOLS

We all have different ideas of what an overpriced school is. The tippy top - like Harvard and Stanford, for example - may be worth some extra borrowing because, in addition to the education, you may end up being roommates with a future president or tech billionaire. That's worth something, right?

But there are a host of second- and third-tier privates that cost well over $50,000 a year to attend. (Many of these same schools are flush with cash that they hand out in the form of merit and need-based aid, so most attendees do get some help.) But if the difference between one of these schools and the solid state school is a 4-year debt load approaching $60,000 or $80,000, take a long, hard look at what you're really getting for that future burden.

GOOD LOANS - THEY'RE AFFORDABLE, BASED ON EXPECTED EARNINGS

College is worth more than job training; the liberal arts education that trains you to be analytical and makes you generally knowledgeable about culture can be as valuable as the technical training that an engineer gets. But the engineer may find it easier to repay a bigger loan than the drama or literature major, at least initially.

"You need to be somewhat mindful of what the earnings potential of the student will be," says Charlie Rocha of Sallie Mae. He recommends that students limit their total college borrowing to the amount they expect to earn in their first year after college.

GOOD LOANS - LOW-FEE, LOW-RATE PRIVATE LOANS

This is the territory that requires judgment calls about how much a family can afford, and whether it's worth it.

Sallie Mae just announced a new fixed-rate loan, boasting interest rates as low as 5.75 percent and as high as 12.875. You're more likely to get the lowest rate if you are an upperclassman, agree to make interest payments while you're in college, opt for an accelerated 7-year payback plan or have your high-credit-scoring parents cosign the loan with you. Those conditions actually make the loan cheaper in the long run, but they also limit your repayment flexibility.

Other lenders offer fixed rate loans, too; some have extra fees and virtually all require a parent to cosign for a reasonable rate. To compare private loans, you can check listings at Simple Tuition (www.simpletuition.com).

BAD LOANS - THEY BURDEN PARENTS, ARE BARELY AFFORDABLE

Some parents can afford to easily borrow money to help their kids through school, and use home equity borrowing or federal PLUS (parent loan for undergraduate students)loans.

"It's fungible," says Sandy Baum, an expert in college funding and a senior fellow at the Graduate School of Education at Georgetown University. "I know people who take out PLUS loans and go on vacation with the money."

That's fine, if it's a money-management strategy employed by a well-heeled parent - though at 7.9 percent interest, PLUS loans aren't a bargain right now.

However, if parents are approaching retirement without enough money for their own security, burdening them with PLUS loans, cosigned private loans or new mortgages might be a very bad investment indeed.

Better options might include cheaper schools, working while attending school part-time, spending the first two years at an affordable community college, or working like mad and squeezing four years into three.

None of that is easy, but it beats having Mom on your couch when you graduate, instead of the other way around. (Editing by Bernadette Baum)