Stafford Loans

Stafford loans are the most common loans and can come directly from the U.S. Department of Education (called direct loans) or from private lenders receiving government guarantees (called a Federal Family Education Loan, or FEEL). Students with financial need qualify for subsidized loans; other students are offered unsubsidized loans. Some are offered a combination of both.

Unsubsidized Stafford loans have a fixed interest rate of 6.8 percent. Subsidized rated for the school year that starts in the fall of 2010 are 4.5 percent. They are slated to go to 3.4 percent in the following year. Interest is charged on Stafford loans from the moment the money is disbursed; the government pays the interest on the subsidized loans until the student leaves college.

The federal government limits the amount of Stafford loans any student can get, as follows:

• Freshman year: $5,500. No more than $3,500 of this amount can be in subsidized loans.
• Sophomore year: 6,500. No more than $4,400 of this amount can be in subsidized loans.
• Junior and senior year: $7,500 each year. No more than $5,500 of this amount can be in subsidized loans.

Student who are independent of their parents--or whose parents fail to qualify for government-sponsored loans--can borrow an additional $20,000 over the four years.

The smart strategy: Stafford loans are not bad, if you will need to borrow money for college. Rates are low when compared to other unsecured debt. They come with a variety of repayment options that can give you flexibility once you graduate and start paying them back. But they are loans, so you should consider other alternatives, which I'll get to shortly. If you have another way to come up with this money, you are free to take the rest of the financial aid package and not take the loans.

And you can also comparison shop for Stafford loans. Even though they all charge the same interest rate, some lenders offer discounts during the repayment period for automatic repayments and making timely payments. You can check other offers at Simple Tuition (www.simpletuition.com) or Bankrate (www.bankrate.com) to see if there's a better deal than the one your college aid officer is showing you. Your college has to process loans from other lenders, even if they aren't on the college's preferred list.

Finally, it's a good idea to try to pay the interest on the loan while your child is still in college. The federal government will pay interest on the subsidized loans while she is in college, but if your child takes any unsubsidized Stafford loans, you can pay the interest yourself while she is in school. That will keep it from compounding on itself. And that interest may be tax deductible, too.

An excerpt from Master Your Debt: Slash Your Monthly Payments And Become Debt-Free by Jordan E. Goodman with Bill Westrom.

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