3 Ways to Make College More Affordable

Affording college these days can seem almost as tough as gaining admission to your dream school. Over the past year, the credit crunch has forced dozens of private student loan lenders to abandon the marketplace and has made it much harder for a growing number of parents to qualify for loans. Making matters worse: With unemployment at a 26-year high, many new grads are having a tough time finding work -- let alone affording their loan payments.

Yet, despite the fact that the credit crunch shows few signs of easing, things are getting a little easier for students and their parents. As part of the College Cost Reduction and Access Act signed into law last September, a new repayment plan will be available to grads on July 1 that will make it easier for them to afford their federal loans by basing monthly payments on their income as opposed to their outstanding federal loan balance. Also starting next month, those who decide to consolidate their variable-rate Stafford and Plus loans will be able to do so at a rate of as low as 2% -- a historic low.

“They’re helpful for the many students and their families who have difficulty affording college and [who are] faced with a real dilemma when [it comes to] paying these loans,” says Peter Mazareas, vice chairman of the College Savings Foundation, a nonprofit focused on college savings strategies.

To help you better afford your college bill, here are three methods worth investigating:

On July 1, income-based repayment (IBR) plans will become available to grads repaying federal Stafford loans, Graduate Plus loans (loans given to graduate students) and federal consolidation loans that are doled out through the direct loan and the federal family education loan programs.

The new plan requires borrowers to pay up to 15% of their discretionary income, says Mark Kantrowitz, a college planning expert with FastWeb.com, a free scholarship matching service. With this plan, discretionary income is defined as the amount by which your income exceeds 150% of the poverty line, which for a single person is $10,380. So, a college graduate making $30,000 will pay $2,063.25 a year, or $171.94 a month. A college graduate with a Stafford loan totaling $30,000 and a fixed rate of 6.8%, would pay twice that amount, or $342.48 per month, according to StudentLoanConsolidator.com, which is part of the Student Loan Network, a student loan provider.

(Another plan, called the income-contingent payment plan, requires borrowers to pay 20% of their discretionary income, says Kalman Chany, president of New York-based Campus Consultants, which provides financial aid assistance. A borrower making $30,000 a year would pay $319.50 per month, or 46% more, on the plan. With this plan, discretionary income is defined as the amount by which your income exceeds 100% of the poverty line.)

Besides making payments more affordable, the income-based repayment plan (as well as the income-contingent plan) also offers another perk: After being on the plan for 10 years, public sector employees are forgiven of any remaining debt.

There is a catch, though. In some cases, a borrower could make payments that are less than what they owe in interest – making it that much harder to ultimately pay off their tab. The federal government will pay for the amount of interest that accrues (that your required monthly payment doesn’t cover) on your subsidized Stafford loans during the first three years of repayment, says Kantrowitz. But for unsubsidized loans, the total accrued unpaid interest will get tacked onto your loan balance should you no longer qualify for IBR and end up in standard repayment, he says.

Borrowers no longer qualify for the IBR plan when their monthly payments start to exceed the amount their regular student loan payments would be. At that point, borrowers are switched to a traditional payment plan.

If you have yet to consolidate your variable rate Stafford and Plus loans (the last time variable rate loans were issued were in 2006), you can take advantage of some historically low rates come July 1, says Chany.

At that point, when you consolidate, you could lock in fixed rates on Stafford loans of between 2% (for those in the grace period, which is the six months after graduation) and 2.5% (for those later in the repayment process) -- down from 3.61% and 4.21%, respectively, which are the current unconsolidated rates. Those who consolidate parent Plus loans would receive an interest rate of 3.38%, down from 5.01%.

If you're thinking about consolidating, these fixed rates will only be available between July 1, 2009, and June 30, 2010. At that point, rates will reset and likely move higher, says Kantrowitz.

Tuition payment plans (also called installment plans), which allow borrowers to evenly split up college tuition costs often over the course of nine to 12 months, have been available for decades, says Mazareas.

These plans don't carry an interest rate or require a credit check. To sign up, families pay an enrollment fee of about $50 to $75 per year. Universities usually administer these programs or hire third parties, like Sallie Mae, Facts Management (a Nelnet company), or Tuition Management Systems, a division of KeyBank, to do so.

While payment plans can help fill in the financial aid gap, they are only worthwhile if parents have enough money to make the monthly payments, says Craig Lockwood, a senior vice president at Tuition Management Systems, which administers these plans. If a parent falls short, their child can get dropped from the program or may encounter difficulty signing up for next semester’s classes, he says.