No scholarship? Three loan options for cash-strapped students

Rising tuition and cuts in grants have opened an alarming gap between the dream of attending college and the reality of paying for it. Even students with grants and scholarships may need to borrow additional money to graduate. Tuition increases--up to 30 percent in some states--and deep cuts in free aid (grants and scholarships) have crushed many a student's hopes of graduating in four years.


For a rising numbers of students, loans provide the only way to pay for education. Three student loan options--Stafford, PLUS and alternative--may be the best funding source for a growing number of today's post-secondary learners.

The shortage of "free money"

It's easy to see why students are depending on loans. In 2010, colleges hiked fees an average of 4.5 percent. Family incomes and housing prices plunged. "Free money"--scholarships and grants--continues to account for billions of dollars in student aid, but it won't close gap created by rising tuition.

Mark Kantrowitz, publisher of Finaid.org, told U.S. News that "college is going to become less affordable" for middle-income and working families. States awarded $8.6 billion in grants in 2010-2011, but that amount may drop as state governments continue deep cuts in their own budgets.

Pell Grants, the mainstay for lower-income students, could also be slashed. Legislators have approved a $5.7 billion cut for the 2011-2012 academic year, reducing across-the-board grants by about $700, according to pellgranteligibility.net. Since 27 percent of U.S. college students depend on full or partial Pell Grants, they'll need to make up the shortfall by either dropping out of school, working part time during the semester or taking on student loans.

First the good news: Stafford Loans

Borrowing money can be especially perilous in an economy drowning in debt. However, Stafford Loans continue to serve as a solid financial aid resource for undergraduate and graduate students. And the good news is that Stafford Loans from the government are about to become more affordable for needy students.

Stafford Loans amounts are based largely on economic need, rather than on credit rating. The government plans to offer lower interest rates to qualified students along with an "income-based repayment" schedule that won't cripple graduates entering the work force. The subsidized Stafford Loan accrues no interest while the student is in college and charges 4.5 percent following graduation. Students who don't meet the low-income qualifications still can receive unsubsidized Stafford Loans with interest accruing at 6.8 percent once the loan is made.

Stafford Loan limits:

  • First-year dependent students: $5,500
  • First-year independent students: $9,500
  • Second-year dependent students: $5,500
  • Second-year independent students: $10,500
  • Third-year and beyond dependent students: $7,500
  • Third-year and beyond independent students: $12,500
  • Graduate or professional degree students: $20,500

Two other loans that can make a difference

Plus Loan and alternative college loan packages can also help pick up the financial aid slack and are worth consideration.

  1. PLUS loan: Students who are still dependents should look into the Federal PLUS loan. With PLUS loans, parents borrow money to support children's education that is not already covered by free money or other loans. Parents must pass a credit check to qualify for the PLUS loan. The total loan amount is set at cost to bridge the gap between the full education fees and existing student aid money. The PLUS Loan comes with a fixed interest rate of 7.9 percent.
  2. Alternative loans: Offered by the college in partnership with private lenders, alternative loans provide the last stop on the block after the student has exhausted Federal loans, grants and scholarships. The benefit of these loans is that they can be applied to tuition, books, housing, transportation and other college-related expenses. Students can apply for them at any time. Interest rates and repayment terms are set the by the lender. Rates are calculated on the Prime Rate or LIBOR Rate base rate, plus the lenders' margin.

Student borrowing always carries a degree of risk. Writing at FinAid.org, publisher Kantrowitz warns against borrowing money above and beyond institutional charges. He suggests that colleges should send students for financial counseling if they're assuming a debt of more than $10,000 per year.