College Loans 101

With college costs still climbing—private-college tuition has soared almost a third since 2004—more students are becoming first-time borrowers. Indeed, 53 percent of incoming freshmen reported using loans last fall, the first significant increase since 2004, according to UCLA’s Higher Education Research Institute. But a sluggish economy and confusing new rules are making it tougher to manage student debt.

Some tips:

Learn the new rules
Recent reforms mean the government will now originate all federal student loans, cutting out the banks that used to act as middlemen. Students who already receive these loans from private lenders will have a chance to consolidate before July 2011, something normally prohibited while in school. Gary Carpenter, director of the National College Advocacy Group, says this could be a boon, since it means dealing with fewer lenders later, but experts warn it may mean losing the postgraduation grace period before repayment starts.

Repay wisely
Research firm Student Lending Analytics estimates that 37 percent of graduates facing loan repayment are struggling, delinquent or in forbearance. Fortunately, a monthly payment cap of 15 percent of income above a certain level recently went into effect for federal loans. And for students matriculating in 2014, that will drop to 10 percent. Private loans—as well as PLUS loans, or Parent Loans for Undergraduate Students—aren’t eligible for such caps, so experts suggest avoiding them when possible.

Find free money
The best way to avoid repayment hassles, of course, is to borrow less. And with grants and scholarships funding a quarter of the average family’s college costs last year, up from 15 percent in 2008, competition has gotten fierce. Fastweb.com, which matches students with scholarships, is a good place to start the hunt. Experts also suggest double-dipping for local scholarships in students’ hometowns and near their colleges. Finally, families should submit the Free Application for Federal Student Aid, or Fafsa, quickly, since some funds are doled out on a first-come-first-served basis.

Jami Makan, SmartMoney Magazine