Video helps explain options for student loans

My daughter heads off to college in the fall, and we're going to have to borrow money to pay the bills.

But I'm confused about the different loan programs. And now I hear on the news that some lenders are pulling out of the student-loan business. Will there be money available? If so, what are the best ways to borrow?

First, let me reassure you that money will be available for student loans. Some private lenders have stopped making student loans, but you still have thousands of others to choose from. And even if all the private lenders pulled out of the market, the Department of Education would step in as lender of last resort.

As for your question about the best ways to borrow for college, you've come to the right place. Kiplinger has produced a new educational video on how to pay for college and borrow wisely if you need to.

Titled "Borrow Smart," the 24-minute video was underwritten by Sallie Mae, the nation's largest student lender, and Discover Student Loans, one of the few lenders that is expanding its student loan business at a time most are pulling back. It's available free at kiplinger.com/borrowsmart and is accompanied by a downloadable guide.

You're not alone in your confusion about student loans. In Sallie Mae's 2007 survey of parents of college-bound freshmen, one-third of those interviewed said they needed basic information about loans and payment plans.

Sallie Mae's research also shows that about 24 percent of students use credit cards to pay for college tuition. That's expensive. There are better, less costly ways to borrow, starting with federal loans for students:

• Perkins loans: Available to students with exceptional financial need, Perkins loans carry a fixed 5 percent interest rate. Repayment begins nine months after graduation; until then, the federal government picks up the interest.

• Subsidized Stafford loans: Like Perkins loans, these loans are based on financial need. Loans disbursed for the 2008-09 academic year carry a fixed 6 percent interest rate. Again, the feds pay the interest until repayment begins, six months after the student leaves school.

• Unsubsidized Stafford loans: Any student who applies for federal financial aid can get one of these loans, regardless of need. Interest starts accruing as soon as the loan is disbursed, at a fixed rate of 6.8 percent. Borrowers can defer repayment until six months after leaving school.

Students can fill any remaining gaps with private loans, which carry variable interest rates based on the borrower's credit rating. Students may need a creditworthy co-signer to get the best interest rates.

Parents who pass a basic credit check also have the option of borrowing through the federal Parent PLUS program at a fixed rate of 8.5 percent. Repayment begins within 60 days of disbursement, but some lenders let you postpone repayment until after a student graduates.

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Janet Bodnar is deputy editor of Kiplinger's Personal Finance magazine and the author of "Raising Money Smart Kids" (Kaplan, $17.95). Send your questions and comments to moneypower@kiplinger.com.