Have you filled out your FAFSA yet? If not, now is the time to do it! Not only can it potentially help your child get grants (the “free” money you don’t have to pay back), it is also your family’s only gateway to federal student loans, which are far and away the best type of student loan available.

And there is even more good news. The loan rates on Subsidized Stafford federal loans are dropping for the coming school year.

Taking a Dip

Families that qualify for need-based aid are the ones who qualify for the

Subsidized Stafford loan–a federal loan whose interest rate is subsidized by the government.  The loan interest is paid by the government while the student is in school.

The College Cost Reduction and Access Act of 2007 began to take effect this year, dropping the fixed rate of these subsidized loans from 6.8% to 5.6%.  The interest rate will drop further to 4.5% for the 2010-2011 school year and then in 2011-2012, students will only be charged 3.4% interest on these loans.

The Unsubsidized Stafford loan does not get an interest rate adjustment down.  These loans will remain fixed at their current 6.8% interest rate.

Look Before You Leap

Though the lower interest rates are wonderful, I always feel it my duty to caution families that are considering education loans. Though they can be a helpful piece of a college funding plan, you should try to make sure they do not become the major component of your family’s plan.  Try instead to utilize savings, current income, applying for scholarships and other cost-cutting strategies to cover the bulk of college costs.

So even as loan rates drop, carefully consider how a student loan might fit into your family’s college funding plan.  If you do decide to use the Stafford loan, have a frank discussion with your student on the responsibilities of carrying debt and how he or she will need to plan ahead to be able to cover the payments once graduation day has passed.  And if you do decide to borrow, be sure you get a federal loan rather than a private student loan from the bank.

All the best,
Deborah Fox

photo: kedy