How to Foot the Bill for College

You won't be alone if after following a regular saving and investing plan for college, you come up short. The government, individual schools and private lenders offered more than $60 billion in 1998 to families who need to bridge the gap between their savings and the costs of attending college.

There are several sources of financial aid for college. Grants and scholarships are the best: they money is usually tax-free and never has to be repaid. These include federal Pell Grants, primarily for low-income families, which offer a maximum $3,000 annually, based on need. The federal Supplemental Educational Opportunity Grant is actually administered by colleges themselves. The size of the award ranges from $100 to $4,000 per student per year. Other sources of aid include federal Work-Study, whereby students work part-time jobs to meet the family's remaining financial need. And finally, loans, which come in two basic types: need-based, which help a family meet the gap between what they can afford and the cost of college, and non-need-based, designed to fill a gap when the family doesn't have available cash, but may have illiquid assets. Loans now represent 60% of all financial aid for college.

The two most common and attractive need-based loans are the Perkins and the Stafford, both federally-funded. The Perkins loan is made directly to the student; parents need not co-sign this loan. Payment begins only after the student graduates, leaves college or falls below half-time student status. The attractions of the Perkins are low interest rates, currently 5%; interest doesn't accrue during college years; and students have 10 years to repay the loan. The cap on borrowing is $15,000 annually, although each college's financial aid office administers the loan and determines the amount.

With the federal government-subsidized Stafford loan, interest does not accrue until six months after a student graduates, leaves or falls below half-time status. Students can borrow maximums that rise the longer a student remains in school, between $2,625 freshman year and $5,500 senior year.

Nearly every student who applies is eligible for non-need-based loans such as the unsubsidized Stafford loan. The drawback is that interest accrues immediately, although the borrower can defer the interest payment until he begins to repay the principle, usually after he graduates or leaves school. The lifetime cap on the interest rate for either form of the Stafford is 8.25%.

A common non-need-based loan is the PLUS, or Parent Loans for Undergraduate Students. As its name implies, this loan is made to parents, not students. Parents can borrow up to the annual cost of attending college, minus any financial aid received. This loan is dependent upon your credit rating, although the requirements are not as stringent as for a mortgage. If you have an adverse credit rating, such as judgments or liens against you, you may still be able to get a PLUS if you can find a co-signer who is willing to take responsibility to pay the loan if you fail to. The drawback of this loan is that repayment begins 60 days after you receive the loan, although the repayment period can last 10 years. The interest rate is variable, tied to the short term Treasury bill rate, with a maximum of 9%.

There are also private loan options such as bank lines of credit, home equity loans and Signature Student loans, offered by Sallie Mae and Excel loans, offered by Nellie Mae. Private loans such as these are less appealing than the unsubsidized Stafford, however, because the interest rate is usually at a premium to the prime rate, and repayment may start immediately, rather than being postponed until the student graduates.

One new feature that parents should take advantage of is federal credit for taxes paid in the same year as tuition. This is almost as good as getting money outright. There are two types of tax credits. One is the Hope, which lets you slash your taxes by up to $1,500 a year per student for tuition paid during the first two years of college -- 100% of the first $1,000 in tuition, and 50% of the next $1,000. The other is the Lifetime Learning Credit, which maxes out at $1,000 -- 20% of as much as $5,000 in tuition payments-but it can be claimed any year in which you don't also take the Hope credit for the same student's tuition. Be careful that you take the credit against tuition and required fees such as for laboratory use. The credits cannot be used for room, board, books and athletic fees. Also, the education must occur within the tax year in which the payment is made, or within the first three months of the following year. Since academic years aren't usually the same as calendar or tax years, you need to be careful how you claim a credit on your tax return.

But best of all, you can use these credits against tuition payments that you already have paid with student loans as long as you take the credit the year the tuition was paid, not the year the loan was repaid.