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Need to Borrow for Your Child’s College? Here’s What You Need to Know About the Most Popular Options

- iStock—Getty Images
iStock—Getty Images

This is the time of year when colleges send out their bills, and parents gasp. What if you can't write a check to cover what's left after your student's scholarships and federal loans?

For more than 1 million parents, the answer is borrowing. It's a risky option—taking on too much can upend retirement plans and drag parents through years of massive bills. But if parent loans are your only choice, you can minimize the dangers by budgeting and shopping wisely.

The first step is estimating the monthly payments you can afford, by running scenarios on loan calculators such as those at Bankrate.com. Remember to plan for at least four years of college, says Martha Savery, director of public affairs at the Massachusetts Education Finance Authority. You also should consider tax implications, says Jim Mahaney, vice president of Strategic Initiatives at Prudential Financial. Some of the interest you pay is deductible depending on your income.

Then, shop around for the rates and terms that fit your family's circumstances. "Don't just take the first loan option you're offered," advises Stephen Dash, CEO of student loan marketplace Credible.com. Finding the right loan could save your family thousands of dollars, especially with today's changing interest rates and evolving loan products. A $40,000 federal PLUS loan will cost about $485 a month and $18,000 in interest over 10 years. A similar home-equity loan would likely cost about $50 less per month, cutting your total interest payments by about $6,000.

Here's a guide to the pros and cons of the most popular options:

1. Federal Plus Loans

Fixed APR: 8%

2. Private Loans

Fixed APR: Averaging 5.4%

Variable rates: Starting at 2.9%

3. Home Equity

Fixed interest rate: Averaging 5.4%

Finally, don't sign any loan papers until you're sure you can handle the payments, and you've read all the fine print, says Debbie Schwartz, founder of the financial aid website Road2College. Education loans are almost impossible to escape—even in bankruptcy. And despite lenders' ads, banks reject 90% of parents' efforts to transfer cosigned loans to their kids. Translation: You'll likely be living with these loans until every penny is paid off.

Check out the full list of Money's best colleges here. And build your own ranking with Money's tool here.

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