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Student loan rates: options to weigh

New interest rates on U.S.-backed loans add about

New interest rates on U.S.-backed loans add about $4,000 for students who borrow four years. (April 22, 2009) Photo Credit: Bloomberg

Interest rates on U.S. government-backed student loans doubled to 6.8 percent from 3.4 percent on Monday.

Democrats, Republicans and the Obama administration failed to strike a deal to prevent the increase, although congressional leaders say an agreement is still possible when lawmakers return next week after the July 4 recess.

For now, students are left without any clarity as they face August bills for the fall semester. If there is no deal, the average student who borrows for four years would pay an additional $4,000 over the life of the loans, according to White House estimates.

Senate leaders have promised that if they strike a deal, it would be retroactive to July 1. So maybe the wisest course of action for would-be students and their parents is to wait another week or two for clarity.

In the meantime, here are some other ways navigate the uncertainty:

Empty the 529 savings account first. If you have money to pay for college, consider using it up before borrowing anything. That will help in two ways: It will keep initial borrowing down, and it will leave you fewer assets, which could help position you for more financial aid.

Consider alternative loans. At 7.9 percent interest, the federal loans for parents -- called Parent Loan for Undergraduate Students -- are not such a great deal, even if Congress acts on student rates. Parents should think of other places they could borrow the money, such as a home equity line of credit.

Shop around, carefully. Some banks and private lenders claim their rates are lower than those on unsubsidized Stafford loans offered by the federal government. But they typically require parental co-signers and often carry other disadvantages such as variable rates that can rise indefinitely and fewer accommodations when it comes time to pay them back.

Earn more, borrow less. Students who do not qualify for a work-study job can go off campus and find employment for a few hours a week, says Scott Weingold, co-founder of the Ohio-based College Planning Network.

Rethink the whole enterprise. Students who are really squeezing their family budget and borrowing large amounts to go to college should make sure they want to follow that path.

Ask yourself: Am I choosing a major that will allow me to pay back my loans? Am I going to a college I can afford? Is there an innovative way to lower costs, such a three-year degree path or tuition-free program? One rule of thumb: Students shouldn't graduate with debt that exceeds what they anticipate earning in their first year out of college.

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