If you need to borrow money for college, be aware: the student loan process is changing significantly. After 45 years of relying on private lenders to finance and administer the majority of federally guaranteed student loans, the federal government will bring lending efforts in-house.

For those seeking Stafford and PLUS loans, you will borrow directly from the federal government, rather than your bank, to secure financing. When it's time to repay the loans, you'll be writing checks to the Department of Education, which is administering the program.

These changes are a result of new regulations signed into law earlier this year that ended the long-standing Federal Family Loan Education Program (FFELP). The FFEL Program encouraged banks to finance and service federal loans in exchange for the government's guarantee to repay them should the borrower default. The new regulations don't lower interest rates or students’ borrowing costs.

Banks Will Continue to Help Fill the Gap
Banks will no longer play a role in issuing federally backed student loans. However, banks will continue to play an important role in helping families finance their children's college education.

The truth is, federally guaranteed loans—along with scholarships and grants—are an important component of many students' financial aid packages, although they often do not cover the entire cost of tuition and living expenses. First-year college students who are still dependents, for example, can obtain a maximum of $5,500 in federal loans their freshman year, $6,500 their second year, and $7,500 in their third and fourth years and beyond.

In contrast, the College Board reports that tuition and fees at public in-state universities averaged more than $7,000 this past school year; at private schools, the average was closer to $26,000. Add in room and board, and those costs can rise by $8,000 to $10,000 a year, creating an even wider gap between a school's cost and a family's ability to pay.

Banks offer alternatives to help families fill these gaps, as well as other services students may need, from checking accounts to debit and credit cards. Bankers can also help parents understand the advantages and disadvantages of selling stock options, withdrawing from savings accounts and other financial strategies for financing an education.

They can also provide loan alternatives, including:

• Private education loans. A private education loan (also called alternative education loan) helps the student bridge the gap between the actual cost of education and the limited amount the government allows them to borrow in its programs.
• Home equity line of credit. A home equity line of credit can be a smart way to help finance a college education. Using home equity as collateral, parents can establish a line of credit that allows them to withdraw funds as needed to match the difference left by other funding sources. Compared to a home equity loan—which provides a lump sum of money—a line of credit only accrues interest on the amount the borrower actually withdraws. In most cases, the interest may be tax-deductible.
• Other options. Unsecured lines of credit, direct installment loans, and even credit cards have their place, whether for an initial tuition payment or to get past a particular short-term financial obstacle. Your banker can help you identify situations when an unsecured loan makes better financial sense than other options.

Every family's situation is different. It's important to talk to your tax advisor to determine what options make sense for you. And talk to your child as well. The more they understand about the financial realities of college, the better able your family will be to make decisions that meet their needs—and yours. iBi