(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 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
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
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)