The Student Loan Shuffle

If you need more than a Stafford, parents should always choose federal PLUS loans at 8.5 percent with a 3 or 4 percent fee. They're cheaper than most alternative loans, which run up to 15 percent, depending on credit scores.

Alternative loans for students are pegged to an interest-rate index. Rates have dropped, but many lenders are raising the number of points they charge over the index. So loan costs to students may stay steady or rise. You can't find out your rate in advance because it depends on a credit check. The rates shown on most sites are only for the very best risks. Applying to several lenders will nick your credit score (five points for one inquiry and it runs up from there), but there's no other way to compare specific costs. Do it, but refine your search first. The largest lenders include Sallie Mae, Citibank, Bank of America and Wells Fargo.

SimpleTuition.com will show you the lowest and highest annual percentage rate at a dozen or more lenders, most of which pay to participate. You'll also get a dollar estimate of what the loans will cost. For technical reasons, the rates published on the site don't always match what the lender is showing. Still, the lowest APR should win the day, founder Kevin Walker says.

When it's time to repay, you can earn a discount in the 0.5 percent range by paying on time for the first four years. But fewer than 10 percent of students manage to do it, says Sallie Mae, often because of slip-ups that cause them to miss the first payment. So ignore future discounts and choose the loan that costs the least upfront. Choose the smallest loan possible, too. And don't let banks sucker you into borrowing more than you need.

Reporter Associate: Temma Ehrenfeld

© 2008