Turned down for a college loan? Don't despair

Flickr user 401(K) 2012

(Moneywatch) I've been getting questions lately from parents who are struggling to pay their children's college bills.

When parents need help covering college costs, they can typically turn to the federal PLUS Loan. Parents can use the PLUS Loan to borrow enough to meet the cost of a school's attendance that isn't covered by their child's financial aid package.

This college loan, which is designated strictly for parents, isn't available to everyone. Parents who are ineligible often have an adverse credit history, including a bankruptcy, a foreclosure or repossession, or bills that are at least 90 days overdue. 

A borrowing alternative

For parents who don't qualify for a PLUS loan, there is an excellent alternative. Their children will be eligible to borrow more cash through the federal Stafford Loan program. Only students can borrow through Stafford, which is superior to the PLUS because it charges lower interest rates and provides built-in protections when borrowers can't handle their debt load. 

The interest rate on the traditional Stafford is 6.8 percent and 3.4 percent on the subsidized Stafford, for which low- and middle-income students may qualify. By comparison, the PLUS charges an interest rate of 7.9 percent, along with a four-percent fee based on the loan amount.

Stafford Loan borrowing limits

The Stafford Loan program does impose borrowing limits, typically as follows:

Freshman: $5,500
Sophomore: $6,500
Junior: $7,500
Senior: $7,500

Students whose parents don't qualify for a PLUS can borrow significantly more under the Stafford program. Here are the yearly Stafford borrowing limits for these students:

Freshman: $9,500
Sophomores, Juniors, Seniors: $12,500

Bottom Line: If your child is rejected for a PLUS Loan, make sure to request a larger Stafford Loan.

Image courtesy of Flickr user 401(K) 2012

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