Student Loan Primer

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PLUS loans. While Staffords are reserved for student borrowers, the Parent PLUS loan, which is also federally backed, is designed for moms and dads. Parents can borrow enough to meet the cost of a school's attendance that isn't covered by their child's financial aid package. Unlike a Stafford, there is no set borrowing limit. While Stafford loans provide a grace period before payments are required, parents must start repaying the PLUS debt up to 60 days after the loan is fully dispersed.

Parents who own homes should compare the fixed rate of a PLUS, along with its fees, with another alternative -- a home equity line of credit. They also need to plug potential tax breaks into this equation. Parents can deduct home equity interest off their taxes if they itemize, but they may also qualify for an above-the-line tax deduction for college loan interest even if they don't itemize.

For parents who don't own a home or who have little home equity, the PLUS Loan is a no-brainer compared to signing a private loan, which should be your last resort.

Let students borrow first. Even if parents intend to borrow for college, it's always better for the student to take out a federal loan in his or her own name first. Why? Stafford loans offer a lower interest rate than the federal PLUS loans. The maximum rate for a Stafford was recently 6.8% versus 8.5% for a PLUS. Beginning in the summer of 2008, the rate became even lower for subsidized Staffords and the interest rates will continue to shrink for these undergraduate borrowers.

Interest Rate Reductions for Subsidized Stafford Loans

Although your son or daughter is responsible for the payments, you can reimburse the child. Young college graduates are more likely than their parents to be eligible to deduct student loan interest off their yearly income tax returns.

Look beyond the preferred list. To make shopping for loans more manageable, many schools compile a list of preferred lenders. A school could maintain a list of lenders for Stafford loans, PLUS loans, private loans, and consolidation loans. Colleges are expected to select lenders for these lists that offer students the best deals on interest rates and/or customer service or other factors.

By now, you can probably appreciate why you shouldn't automatically assume that these preferred lists are stuffed with tremendous deals. Ask a school's financial aid administrator why lenders made the cut and use these names only as a starting point since you can borrow from any lender. You'll want to ask about interest rates, fees, customer service, and any interest rate discounts. As of July 2008, federal regulations began requiring that colleges put at least three lenders on their preferred lists.