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Six Ways to Borrow for College

Do you have one or more children attending college? If you do, we don't have to tell you that the numbers are staggering. Fortunately, there are several financing options that may help ease the cash crunch.

Here are six common types of loans that may be used to help pay for college expenses.

1. Stafford loans: These government-sponsored loans are available to students, not parents. Currently, first-year students can borrow up to $2,625 through the Stafford loan program. If a student qualifies for a subsidized loan based on financial need, the government pays the interest while the student is in school. With an unsubsidized loan (i.e., a loan not based on need), the student owes interest on the loan while he or she is in school. However, the student can choose to add the interest to the loan balance, which must be repaid after graduation. Note that subsidized Stafford loans are considered to be part of the student's overall financial aid package.
   
2. PLUS loans: This is another type of government-sponsored loan. With a loan under the Parent Loans for Undergraduate Students (PLUS) program, creditworthy parents may borrow up to the amount of the student's cost of attendance minus any other financial aid. The interest rate for PLUS loans is tied to the three-month Treasury-bill rate (but capped at 9%). Generally, repayments must begin within 60 days of the final loan disbursement.
   
3. Retirement-plan loans: Certain retirement plans permit you to borrow funds penalty-free if the funds are used to pay for a college education. Although the interest rates may be favorable, you will typically face restrictions on loan amounts and repayments. Most significantly, you will be eroding the nest egg you are trying to build for retirement.
   
4. Home equity loans: If you have sufficient equity in your home, you may tap into it through a home equity loan or line of credit (where permitted by state law). Remember that the interest paid on the first $100,000 of home equity debt is deductible as mortgage interest. However, the loan must be secured by your home, so use this technique with discretion.
   
5. Intra-family loans: In a pinch, you might borrow money from a relative to help pay for college. Be careful to structure the loan properly with a prevailing interest rate and repayment terms. Reason: If the IRS thinks the deal is a sham, it might impute interest to the lenders, even if they don't receive any money back.
   
   Note: There are several key exceptions for intra-family loans. First, the imputed interest rules only apply to intra-family loans above $10,000. Second, for loans of $100,000 or less, the amount of imputed interest is limited to the borrower's annual net investment income. Finally, if the borrower's net investment income is $1,000 or less, no taxable interest is imputed on the loan.
   
6. Life insurance loans: You may be able to obtain favorable terms by borrowing against the cash value of a life insurance policy. However, as with a retirement-plan loan, you are "borrowing from Peter to pay Paul" and potentially jeopardizing another aspect of your financial plan. This option is generally used as a last resort.

This list is not all-inclusive. It is just meant to provide an overview of some basic options for parents and their children.

Final word: Be aware of all of the repercussions when you take out loans to help pay for college expenses. Your financial advisers can steer you in the right direction.

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