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Is it worth taking a large loan to pay the whole college bill now?

September 13, 2011: 5:05 AM ET

My daughter will be attending college this fall. My husband wants to take out a private loan to pay for her entire education now because of the threat of higher interest rates. What are the advantages and disadvantages of doing this?
-- Kathy, Alabama

Before you borrow from a private lender to pay for a college education, your child should first take advantage of federal loan programs that provide funds one year at a time, particularly if your student can demonstrate enough financial need to qualify for a subsidized Stafford Loan, the interest rate on which is fixed at 3.4% for the coming school year. Among the advantages of a subsidized loan: the government will pay interest while your student is enrolled in college and repayment may be deferred for up to six months after the student graduates or leaves school.

The government is charging interest of 6.8% for unsubsidized Stafford loans, which come with more standard lending terms and are available regardless of need. Loans to parents borrowing for their child's education often have higher rates. The current federal PLUS Loan rate is 7.9%. Again, funds are disbursed one year at a time.

Education loans from private lenders can run even higher—though if you have sterling credit you may be able to secure a starting rate of 4.25% or less. Even so, there's a hitch: interest rates on these are typically variable, and reset either monthly or quarterly. So the benefit of low rates may not last through your daughter's education and beyond as you repay the loan. Bottom line: It would be a gamble to borrow today for four years of college up front unless you plan to pay the loan off quickly. "When interest rates begin rising again, borrowers in variable rate loans will experience increases of as much as 5 or more percentage points in the rates they are paying on private student loans," predicts education lending expert Mark Kantrowitz, publisher of FinAid.org. "Then that 4.25% loan will cost you more than a fixed rate federal loan."

The one case in which borrowing in advance may pay off is if you can prepay tuition at your child's school because at least you'll be able to avoid the inevitable annual rise in tuition and fees—which climbed an average 4.5% at private universities last year and 6.9% at in-state public universities, according to the College Board.

Still, think hard before you take on the loan yourself. While it's wonderful to pay for your children's college education if you can afford it, it's not worth putting your retirement security at risk. "There's no financial aid for retirement," cautions financial planner Scott Brewster of Brewster Financial Planning.

-- Allan Chernoff

Got a question for the help desk? Send it to helpdesk@cnnmoney.com.

Posted in: Family Money
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