Best Deals on College Student Loans

Your first step in keeping college costs under control is to make some hard decisions about the type of school your family can afford. If you and your children are going to rely on loans to pay part of the cost, your next step is to decide how much debt is reasonable.

Set a limit that's realistic. As a benchmark, the average student-loan debt among graduating seniors is just over $19,000. One financial-aid officer says it's reasonable if a student graduates owing less than $25,000. That's roughly the cost of one year's tuition at this official's private college.

At the lower end, more than half of all full-time students enrolled in public four-year colleges pay in-state tuition and fees between $3,000 and $6,000 a year. So a student splitting the total cost with his or her parents might reasonably borrow $12,000 or less.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

Once you've decided on a limit, stick with the federal loan programs: Perkins and Stafford loans for students. At 5%, Perkins loans are the cheapest, but they're available only to students with the greatest financial need. For most students, Stafford loans are the best deal around. Any student can borrow at a fixed rate of 6.8%. Next September's incoming freshmen may borrow up to $3,500 for their first year, and a total of $23,000 for their undergraduate education.

Interest accrues while your child is a student, but he or she doesn't have to begin repaying the loans until six months after graduation. If your family qualifies for a subsidized Stafford loan on the basis of financial need, the government will pay the interest while your child is in school.

Despite the advantages, many students don't exhaust all the Stafford loan money to which they're entitled. Some families are apparently put off by having to fill out the Free Application for Federal Student Aid (FAFSA), a prerequisite for getting a Stafford loan.

Don't fear the FAFSA. In addition to a low interest rate, Stafford loans come with attractive benefits when it's time to repay. For example, borrowers can defer repayment if they attend graduate school, or renegotiate loan terms to stretch out or lower their payments.

Get a list of lenders from your child's school, or from FinAid (www.finaid.com) or the Education Finance Council (www.efc.org), which lists state-run programs. Rates and loan terms are fairly standard. Some lenders do offer attractive discounts, such as a waiver of the loan-origination fee when the loan is disbursed. Immediate discounts are better than future benefits tied to a certain number of on-time payments, a requirement that's tough to meet.

See Janet's college-financing series:

• Smart Ways to Pay for College
• Best Deals on Student Loans
• College Loans for Parents
• How to Pay off Student Loans
• How Much College Debt is Too Much?