There are many different kinds of education loans, but they fall into two main categories: need-based loans, which are designed to help meet part of a family's remaining need (as determined by the federal government or your school); and non-need based loans, which are designed to help pay part of the expected family contribution when the family doesn't have the cash on hand. The loans that will be offered as part of your aid package in the award letter are primarily need-based loans.

Federally subsidized Perkins and Stafford loans are the best need-based loans available to students. They are such good deals that we feel families should always accept them if they are offered. Both fall far below prevailing interest rates. In most cases, no interest is charged while the student is in school, and repayment does not begin on Perkins or Stafford loans until the student graduates, leaves college or graduate school, or drops below half-time status.

Even if you have money in the bank, we would still counsel your taking the loans. Let your money earn interest in the bank. When the loans come due, you can pay them off immediately, in full if you like, without penalty. Most college loans, with the exception of the Perkins loans, have some kind of an origination fee (a one-time-only cost that averages about 3% of the value of the loan) and perhaps an insurance fee as well. These fees are deducted from the value of the loan itself; you will never have to pay them out of your pocket.

Formerly known as National Direct Student Loans (NDSL), these loans are made only to the student and carry the very low interest rate of 5%. Payment begins only after the student graduates, leaves school, or drops below half-time status. No interest accrues during the college years, and students have up to ten years to repay. Although the money comes from the government, these loans are administered through the college aid office.

The federal government gives the college a lump sum every year, but the Financial Aid Officer gets to decide which students receive these loans and how much they receive, based on need. Undergraduates can borrow up to $4,000 per year, with a cap of $20,000. Students must show a strong degree of need to be granted these loans.

There are two types of Stafford loans: "subsidized" and "unsubsidized."

Subsidized Stafford loans are available to students who have shown "need" as determined by their financial aid application. The federal government subsidizes the loan by not charging any interest until six months after the student graduates, leaves college, or falls below half-time attendance status.

Unsubsidized Stafford loans are not based on need. Virtually all students who fill out a FAFSA are eligible for these loans. From the moment a student takes out an unsubsidized Stafford loan, however, he or she will be charged interest. Students are given the option of paying the interest while in school or deferring payments (which will continue to accrue) until repayment of principal begins.

In both cases the federal government guarantees the loan, which ensures a very low interest rate. (Today, the in-school interest rate is 7.59%). The dependent student may be eligible to borrow up to $2,625 for the freshman year, up to $3,500 for the sophomore year, and up to $5,500 per year for the remaining undergraduate years. Graduate students can borrow up to $18,500 per year; however, only a maximum of $8,000 per year will be a subsidized Stafford.

One other wrinkle about Stafford loans: since 1994, some schools have administered their loans directly through the government's Direct Lending program, while others continue to use banks and other lenders. While the banks have lowered the costs of these loans through repayment discounts, the Direct Lending program does not offer these discounts.

As credit-based loans go, it's hard to beat the PLUS loan. Parents can borrow up to the total cost of attendance at a college minus any financial aid received. This means any parent--if Bill Gates wants to take out a PLUS loan when his daughter goes to college, he will be able to! The interest rate on these loans is variable, but currently is capped at 9% for new borrowers. Repayment begins 60 days after you receive the loan and may extend up to 10 years. Though it is a credit-based loan, we have found that the credit standards are not all that stringent, and that the vast majority of applicants are approved for this loan.

Many lenders have developed alternatives to the federal programs listed above to help families cope with the expense of an education. These alternative loans often mimic some of the best features of the federal programs, including low interest rates and various repayment options.

Another approach is to use a home equity loan. Because they have the advantages of low interest rates and tax deductibility, many families find that these loans are an excellent financial strategy for meeting education costs. Moreover, the funds need not be spent only on direct college costs, but also can be used for big-ticket items such as computers or travel.