PAYING FOR COLLEGE. Growing debts, new loan rules

WITH $40,000, you could buy a sporty convertible, or a piece of paper that tells others, perhaps in Latin, that you made it through four years of college. Like most people, you'll probably go for the diploma, even though you don't have $40,000.

But as a result, you and almost half your class will leave school with hefty debts. Within the past year, the Federal government has once again tightened its giving and lending standards - amending the 1965 Higher Education Act - and reduced the amount of scholarship and grant money awarded. It has, however, increased its huge and costly Guaranteed Student Loan program, as well as its subsidy to the National Direct Student Loan program.

One major change is that everyone must now demonstrate financial need to get a federal loan. While some say this only effects upper middle-income families, a recent study by the Joint Economic Committee suggests that poorer families are borrowing far more heavily, but aren't necessarily able to pay off the loans. Under the old system, only families earning more than $30,000 a year had to pass a needs test.

Another major change, a more visible one, is the enormous increase in paperwork for both the government and financial aid offices.

There are two federal need-based loan programs:

The Guaranteed Student Loan (GSL) program is the largest, with nearly 4 million borrowers, and an increased borrowing base. Students can now borrow up to $2,625 for each of the first two years at school, and $4,000 for each of the following years. A student may borrow a total of $54,750 - more than twice the previous amount allowed - for graduate school.

The annual interest rate on GSLs remains at 8 percent, until after the fifth year, when it goes up to 10 percent. Most borrowers are given 10 years to repay the loan. To get a GSL, you must apply through a bank, credit union, or savings and loan.

If you qualify as an especially needy student, you may be eligible for a National Direct Student Loan (NDSL), also known as Perkins Loans named for the late chairman of the House Labor and Education Committee, Carl Perkins.

While the amount has been increased, the most any student can borrow in the first two years is $4,500 (total), and only $18,000 for all years including graduate studies. However, you can get an NDSL in addition to your GSL, if you show extreme need, says P. Jerome Cunningham, outgoing financial aid director at Weslyan University in Middletown, Conn. In this case, you may also be eligible for a Pell Grant.

The annual interest rate remains at a low 5 percent, subsidized by the federal government. And students do not have to begin repaying their NDSL until nine months after leaving school, three months later than under previous law.

Both the GSL and NDSL receive an interest-paying subsidy from the government. This means students don't have to pay interest on the loans while they're in school or during the grace period after graduation. And once they begin repayment, interest remains at the 5 percent level.

There are other loans available with less favorable terms:

Parental Loans to Undergraduate Students (PLUS), and other supplemental loans can be taken out in addition to a GSL. But they carry a market interest rate, which accumulates while you're still in school, and do not have the long-term payback period.

Private loans for special needs

Many private institutions offer their own loans, for especially needy students, or for academic reasons. Ask your financial-aid office what these are.

Several states are now offering loans as incentives to attract potential teachers. In order to keep educators in Connecticut, for example, the state offers Educational Loans to Encourage Excellence in Teaching program (ELEET), which it will forgive if the graduate stays in the state to teach.

For students interested in volunteer or social work after school, the government has created the Income Contingent Loan Program, which allows students to pay back their loans at a rate consistent with their income.

However, unlike with the GSL and NDSL, the borrower assumes the full cost of the loan: The interest would be the same as on a 91-day Treasury bill, plus 3 percent to cover interest lost during the borrower's college years and to privide a hedge against defaults.

The plan, enacted by Congress in 1986, is scheduled to run on a 5-year, pilot basis. But many hope the plan won't last, arguing that it benefits the government, not the recipient.

``People with the lowest income - the longest pay-back period - end up paying the most for their loans,'' says Mary Preston, legislative director at the US Students Association, a Washington lobbying group.

But because it takes the interest burden away from the government - a burden that is already staggering under the GSL and NDSL programs - it ``allows more poeple to be considered for larger loans, and with longer repayment periods,'' Mr. Cunningham says.

Making sense out of multiple loans

Students must still meet eligiblity standards now used for other federal aid. Recipients would be given as much time as they needed to repay the debt, the monthly payments set so they would not exceed 15 percent of the graduate's annual income.

Having more than one loan could prove taxing, not only in trying to keep track of monthly payments and having to write separate checks for each one, but also in simply meeting total payments each month.

If upon graduation you find your salary is too small to cover your loan schedule, and your loans total at least $5,000, you can apply to enter a loan-consolidation program. By trading in all or some of your old loans, payable in 10 years or less, you get one, new loan, with as much as 15 extra years in which to pay it off.

Loans are usually consolidated at 9 percent interest, so ``if you have a lot of low-interest loans, you're better off keeping them,'' Ms. Preston says. But if you have several high-interest loans - and any over 12 percent - you could bring your interest rate down by borrowing to pay these off, and then paying off the new loan at the ``blended rate,'' says Anne Zartarian, financial aid director at Trinity College in Hartford, Conn.

Both the GSL and the NDSL qualify for consolidation. So do PLUS loans, including the Health Professions Student Loans (HPSLs) and Auxiliary Loans to Assist Students (ALAS). And all you must do is sign for it - no collateral is necessary - so if your bank asks for a cosigner or a credit check, borrow from the Student Loan Marketing Association (Sallie Mae) instead. You cannot consolidate a loan that's 90 days or more past due.

Because of the drawbacks, however, you should not consolidate your loans if:

You can pay it off now.

Your present loans carry interest rates lower than 9 percent. Consolidating them will raise an already low cost.

You are in, or plan on entering, the armed forces, a professional internship, or full-time volunteer work for a tax-exempt organization. Your loans will not be deferred in most cases. And where consolidation does let you defer principal payments, you still have to pay the interest.