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The best interest rates on student loans currently are Stafford loans that are direct loans from the federal government at 3.86%. However, they are capped at $5500 for incoming freshmen, $6500 for sophomores and $7500 for juniors and seniors. There are two types of these loans – subsidized and unsubsidized. If you or your child qualifies based on need, they will be subsidized by the federal government meaning that you will not be required to pay any interest while still in school. And if you or your child has an exceptional need, you might qualify for an additional $5500 in Perkins loans where the interest charge is 5%. Beyond this, your child’s school may offer you a Direct PLUS loans at a fixed rate of 6.41%. These loans are more expensive than loans your child could get and are not eligible for a loan forgiveness or consolidation. However, they would still be a better deal than private loans where the interest charge could be 13% or even more.
Leave your retirement savings alone
While you might be tempted to raid your retirement savings to help pay for your child's education, don't do it. First, if you pull money out of your retirement fund, you will have more taxable income that will ultimately serve to reduce your child's financial aid eligibility when you fill out next year's FAFSA. And yes, you do have to fill this out every year. Second, while you can borrow to help pay for your child's education, you can’t borrow to pay for your retirement.
Have a heart-to-heart talk with your child
We know that you want to give your child everything possible so that it's hard to say no. But this is the time when you need to calculate everything in terms of the school, how much you can contribute and how much in loans your child is willing to take on. You will need to get your financial aid offers in front of you and then consider your circumstances. Do you have another child who will soon be in college or other upcoming large expenses? Also, be sure to talk about your child's goals. As an example of this, if your kid has not yet decided on a major, maybe he or she could do well in a cheaper in-state public school while saving up for a graduate program at a more prestigious college. And if your kid is eyeing a low-paying profession such as teaching or working for a nonprofit, don't freak out. He or she may be eligible for federal student loan repayment programs that would help ease the burden.
Choose a school that will accept your child's college credits
If your child has taken AP or honors classes, check to see if the schools you are considering will give college credit. We know of one kid who was a high achiever and graduated in three years because when he began school he had almost two semesters' worth of credits from his AP classes. In addition, he had a waiver for his school's foreign language requirement. This means that even if your kid's number one choice has a high net price you could be looking at a lower overall attendance cost (for three years) compared to a school that costs less but that doesn't accept his or her AP credits and would then require four years.
Visit the school
If you can afford it, be sure to tour your kid's top-choice schools. You might check out the dining hall and the dorms and be sure to have a chat with one of the school's financial aid counselors. There are cases where the lesser name school that offers a bigger financial package looks better when you see it up close and personal.
Don't be afraid to try to negotiate
Finally, if your child has gotten financial aid offers from schools that were not his top choices, don't be afraid to call the school he or she really wants to attend and discuss your other options. You have nothing to lose and the school could decide to woo you by increasing the size of its financial aid package. And you should definitely call the school if your situation has changed such as a divorce or you've lost your job, etc. When you call, have all your financial information ready. Be very clear, polite and not pushy. Remember that you're talking to a person who might make $40,000 a year so don't cry poverty if you earn more than $100,000.