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Student Loans: Outflank The Hikes Ahead


College tuition costs have been rising faster than inflation for decades, but budget cutters in Congress added a little extra pain for parents and students this year. As part of a $40 billion budget-reduction package expected to be signed into law soon by President George W. Bush, lawmakers cut $13 billion from the student loan program.

Since much of that money subsidizes interest costs on student loans, borrowers will face higher rates. The rate on Stafford loans to students jumps to 6.8% starting on July 1, from the current 4.7%. Parent Loans for Undergraduate Students, or PLUS loans, rise to 8.5% from 6.1% currently. The borrowing limit for subsidized loans is $23,000 for an undergraduate and $65,000 for graduate students.

STRATEGIC MOVES

It's not quite as bad as it looks, however. The old rates were reset annually, while the new rates will be fixed for the life of a loan. And because the Federal Reserve Board has hiked rates for the past year, those old bargain rates were set to rise in July anyway, to 6.5% on Staffords and 7.4% on PLUS loans. The revised program also phases out a 3% origination fee charged on federally backed loans, but many lenders, such as Citibank (C) and Sallie Mae (SLM), had already decided last year to absorb the fee for competitive reasons.

You can use several strategies to cushion the blow. First, if you have already graduated and haven't consolidated all your loans -- or are graduating this spring -- be sure to do so before June 30. That allows you to lock in a 4.7% rate for the life of the loan. (If you're still in school, ask your lender if you can consolidate now.) For those with kids heading back to school in the fall, spend more time looking for local or specialized grant programs for your budding biologist or debate champion. The Web site collegeanswer.com has a searchable database of more than $15 billion worth of scholarships available every year (www.collegeanswer.com/paying/scholarship_search/pay_scholarship_search.jsp). Many states also have their own loan programs, some with more generous terms than the feds'. Be sure to check both the state where you live and the state where the student attends school.

Some parents may be thinking about a variable-rate private loan instead of tapping the revised PLUS program. Such loans are available at 7%, but there are downsides, warns Frank Ballmann, executive vice-president at Affinity Direct, a student loan consolidation lender. Rates on private loans can rise dramatically if short-term interest rates head up further, with caps as high as 20%. If a parent dies or is disabled, the obligation remains, whereas PLUS loans are retired.

Even with higher rates, there are two ways to trim costs after graduation. Sallie Mae and other private lenders typically cut their rates by 0.25 percentage points for those who make their payments electronically out of a checking account. Borrowers who make 30 to 48 payments in a row on time can get their rate slashed by an additional full percentage point.

If you have loans made directly by the government, it may be a good idea to consolidate them with a private lender. That will allow you to take advantage of those nifty perks.

By Aaron Pressman


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