College loans `impossible'

Personal Finance

February 13, 2007|By Eileen Ambrose | Eileen Ambrose,Sun Columnist

Eva and her husband have two children in college, and a third headed to campus in two years. But the Baltimore mother is already feeling the weight of education loans.

Eva was a stay-at-home parent when her children were younger, and says the family didn't have extra cash to squirrel away in a college fund. Today, with her back at work, she and her husband's combined salaries are $120,000.

Her son, a junior at a state college, and her daughter, a freshman at a private college, both receive federally subsidized loans. Eva and her husband have financed the rest largely with federal PLUS loans. So far, the couple has borrowed $12,000 a year for their son's education and $24,000 for their daughter's.

"We are just trying to provide our kids with an education, but we are beginning to think this is impossible! There are so many different loans out there it is hard to know which way to go," Eva writes in an e-mail. "I know a lot of other folks in this boat - with the March deadline fast approaching for FAFSA - we are trying to figure out what to do."

Don't focus on loans just yet, says Kalman Chany, author of Paying for College Without Going Broke. Eva's first priority is to fill out the Free Application for Federal Student Aid by the deadline.

"You want to do the FAFSA to the best advantage. If you can do that, you could get more aid and not have to borrow as much," he says.

That includes avoiding common mistakes, such as reporting the wrong amount of income tax, Chany says. Sometimes parents mistakenly report that they paid no income taxes because they got a refund, he says.

Ellen Frishberg, director of student financial services at Johns Hopkins University, is concerned about the rate at which Eva and her husband are borrowing. Frishberg suggests the parents look for ways to pay more of the college costs out of pocket so they borrow less.

"There are savings just from having a child leave home - car insurance, food, out-of-pocket - that could have been used to pay some of the cost," she says.

Frishberg also recommends that the family appeal for more assistance from financial aid offices. The family paying $36,000 this academic year for two in college is "way beyond what the need analysis would suggest at their income level," she says.

Chany also suggests the parents shop around before taking out loans. The interest rate on federal loans for parents is 8.5 percent. But Chany says the Missouri Higher Education Loan Authority, a loan servicer, lops off 2 percentage points when parents make payments through automatic withdrawals from their bank account. And you don't have to be a resident of the Show-Me state to qualify, he says.

An alternative is using a home-equity line of credit. The interest is tax-deductible, effectively cutting the interest rate, Frishberg says. Chany adds that Eva and her husband may be eligible for tax breaks.

Given that their income doesn't exceed $130,000, the couple will qualify for a deduction worth up to $4,000 in tuition and fees paid last year, he says. The deduction doesn't appear on tax returns for 2006 because Congress extended this tax break after tax forms were printed. But you can claim it on line 35 of the 1040.

Parents may also be able to deduct up to $2,500 in interest paid on education loans.

Questions? Comments? Write personal.finance@baltsun.com.

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