Borrowing 101

It's panic time for a lot of families whose students head to college next month. Maybe your job suddenly feels insecure or the money you saved for tuition lies buried in the stock market.

For a crying towel, call the experts at the college aid office. This time of year, they're handing out lists of fast-money sources as if they were hankies.

You don't necessarily need a loan. At most schools you can gain some breathing room by paying your bill in monthly installments rather than writing a single, fat check when each semester starts. No interest is charged. If you owe $10,000, you might arrange for 10 monthly payments of $1,000 each. Your paycheck gets squeezed (for college parents, what's new about that?), but it often beats borrowing. Tuition-payment plans are usually managed by outside firms, such as Academic Management Services in Swansea, Mass., and Tuition Management Systems in Newport, R.I.

If borrowing seems inevitable, there couldn't be a better time. Interest rates on college loans have fallen to historic lows. Some parents make a combo choice, says Maureen McCarthy Mello, senior vice president for Academic Management Services. You pay part of the bill through a monthly plan and borrow the rest in a low-cost supplemental loan.

So which loan? By now, students should have their basic, government-backed Stafford Loan in hand. Undergraduates can borrow $2,625 to $5,500 a year, depending on how far along they are in school. The interest rate on Staffords just dropped to an amazing 4.06 percent for those repaying now (rates change each July 1). Payments are deferred as long as you're in school.

Homeowners love home-equity loans. Currently, you'd pay about 5 percent on a variable loan or 7 percent for a fixed rate--all tax-deductible.

If that's not an option, consider the government-backed PLUS loan for parents. You can borrow up to the full cost of school minus any financial aid such as grants and government loans. There's a credit check, but you don't have to put up collateral or meet any income requirements. The government's current variable rate for a PLUS: just 4.86 percent, and a 3 percent upfront fee that's deducted from the loan proceeds. The loan-guarantee agencies may tack on 1 percent more.

Some schools offer PLUS loans directly; others refer you to independent lenders. Either way, you should get a provisional OK within 24 to 48 hours. Repayments begin 60 days after you borrow the money. Private lenders may vary the terms of the PLUS. For a couple of cheapies, look at Tuition Management Systems: 3.86 percent and a 4 percent upfront fee (borrowsmart-trust.com; 800-722-4867). Or Nellie Mae, 4.86 percent plus a 3 percent fee (. nelliemae.com; 800-367-8848).

Many lenders compete with PLUS by offering alternative loans. These may be in the student's name with a parent--or some other saint--cosigning. Citibank's no-fee, variable-rate loans cost 5.25 percent (studentloan.com; 800-967-2400). At Sallie Mae, borrowers with "excellent" credit pay 5.25 percent; those with only "fair" credit pay 6.75 percent and a 6 percent fee (salliemae.com; 800-695-3317).

States typically offer loan programs, too. New Jersey's NJCLASS sports low rates--4.75 percent variable and up to 6.6 percent for a fixed-rate loan, and a 3 percent upfront fee. California's CalEdge socks you for up to 8.25 percent fixed and a fat 5 percent fee.

Starting this year, $2,500 in college-loan interest is tax-deductible for singles with incomes up to $50,000 and marrieds up to $100,000. After that, the write-off phases out.

All in all, there's plenty of college money around. Just watch out for what you pay.