(MONEY Magazine) – When savings and financial aid fall short of your child's college costs, you can usually borrow the difference. (See the table below for your best loan choices.) Before you do, however, carefully consider strategies to lower your interest charges. "Many parents act impulsively in borrowing for their children's college education," says Raymond Loewe, president of College Money Inc., a financial planning firm in Marlton, N.J. "They take on a lot of debt and overextend themselves -- just when they should be gearing up their savings for retirement." Luckily, there are a few ways to borrow as much as you need at reasonable rates. Start with the federal government's variable-rate student loan program. Any full- or part-time undergraduate can take out an unsubsidized Stafford Loan (1994-95 interest rate: 7.25%) for $2,625 to $5,500 annually -- the amount increases as the student progresses through school. Payments can be deferred until six months after graduation. At that time, borrowers can choose from a number of repayment options, including one that requires him or her to pay a fixed percentage of annual income, say 5% or 10%, until the debt is retired. (With subsidized Stafford Loans, which are part of colleges' financial aid packages, the government pays the interest while the student is in school.) Banks, credit unions and other private lenders make most Stafford Loans, which are insured by state guarantee agencies and reinsured by the federal government. Applications are available from most banks and college financial aid offices. You might also ask aid officers for the names of Stafford lenders that sell their loans to the Student Loan Marketing Association (Sallie Mae). The company will knock two percentage points off a loan's interest rate after a borrower makes the first 48 monthly payments on time. Graduates who ask Sallie Mae to deduct their monthly payments directly from their bank accounts can get an additional quarter-point discount. Your child can also cut borrowing costs by spending nine months to a year as a member of AmeriCorps, the federal government's new national-service organization. This year some 20,000 volunteers will participate in the program, which will be expanded to about 100,000 members in 1996. (Call 800-942-2677 for information and an application.) In exchange for a living allowance of about $7,500, a participant works for a year in a community service program, such as an environmental task force, and then receives $4,725 for future college tuition or to help pay student loans. * Want to keep your child from taking on a load of debt? Consider applying for a federal PLUS loan (1994-95 rate: 8.38%), usually through a bank or other private lender. A PLUS (Parent Loans to Undergraduate Students) loan can cover the full cost of your child's education minus any financial aid, and the interest rate is often one to three percentage points lower than private lenders charge. Moreover, up-front fees on PLUS as well as Stafford Loans now total only 4%, down from 8% in 1993-94. In addition, some lenders will waive all or part of their 1% insurance fee on federally insured loans, cutting your up-front costs to as little as 3% of the amount borrowed, vs. 3% to 5% on a private loan. To qualify for a PLUS loan, you must have no loan delinquencies of more than 90 days, and your child must be attending college at least half time, which is generally defined as more than 12 classroom hours a week. While private lenders will still make most federal loans this fall, that will soon change. By 1995, about 500 colleges will be enrolled in the new Federal Direct Student Loan Program. Students at those schools and their parents will be eligible for Stafford or PLUS loans dispensed by the U.S. Department of Education, cutting out private lenders. The department plans to make these direct loans available to students at 60% of colleges by 1998. After that, if Congress votes to continue the program, it will be expanded to all schools. The benefits: Loans will be approved more quickly and at the same interest rate as if you received the loan through a bank. On the other hand, borrowers will have to pay 1% insurance fees and won't be able to get a rate discount from Sallie Mae, because these loans will not be sold on the secondary market. Yet another low-cost option worth considering is a home-equity line of credit (mid-August average rate: a tax-deductible 8.87%). You generally can tap up to 80% of your home equity as you need money. With a credit line, you can draw from the funds whenever tuition bills are due and typically pay as little as 1.5% of the amount you owe during months when you are short of cash. One major caveat: If you fail to make payments, you risk losing your house. If you plan to combine a home-equity line of credit with other loans or with student financial aid, get the credit line first. Reason: Many schools take the value of your home equity into account when calculating your family's financial need. Because an outstanding home-equity loan reduces your equity, it may boost your chances of qualifying for need-based scholarships and grants from a college's own funds. (The formula for federal financial aid doesn't take home equity into account.) And since it's easier to qualify for a line of credit when your monthly debt payments are less than 40% of your income, hold off your application, say, for a PLUS loan until you've arranged your home- equity line. As a last resort, you may want to borrow against a cash-value life insurance policy, a 401(k) retirement account or a profit-sharing plan. For annual interest of 6% to 8%, an insurer will lend you the full cash value of a life insurance policy. You don't ever have to pay the money back, but if you die with a loan outstanding, your beneficiaries will get the policy's face value minus the unpaid balance. Your insurance agent can tell you how to arrange for a loan.

For information on loans against your balance in a 401(k) or profit-sharing plan, see your company's benefits department. Most plans let you take out as much as half of your vested balance or $50,000, whichever is less, as long as you pay it back within five years with interest (typically, the prime rate plus one percentage point). Otherwise, the loan will be considered a withdrawal, and you'll owe regular income taxes on it, as well as a 10% penalty.

BOX: Loans That Will Speed You to Your Goal

As this summary shows, it's hard to beat the federal government's Unsubsidized Stafford and Plus offerings. The loans are listed from the lowest rate to the highest, as of mid-August. See the story for credit requirements.

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