(MONEY Magazine) – WITH TUITION RISING ABOUT 6.5% A year and Congress assaulting federal financial aid, you might wonder whether your son or daughter can graduate from college without a ball-and-chain debt to drag through middle age--or, just as bad, whether your child's college bills will soak up all of your retirement savings. Fortunately, the outlook is really not so grim. "There's no reason to have to dip into your retirement money to pay your children's college bills," says Lisa Osofsky, director of personal financial services for M.R. Weiser, an accounting firm in Iselin, N.J. Students and parents can choose among several excellent low-cost loan options.

Your best choices, if your kids can't qualify for need-based aid, may be two low-interest federal loan programs--the unsubsidized Stafford and the PLUS. Both are available for degree-seeking students enrolled in school at least half time, which generally means six or more classroom hours a week.

With a Stafford Loan, your child can borrow as much as $2,625 to $10,500 annually, the maximum rising as the student advances through school. The variable interest rate equals the three-month Treasury bill rate plus 3.1 percentage points, with a 8.25% cap (1995-96 rate: 8.25%). Rates are adjusted every July 1. Depending on the final congressional cuts in college aid, the maximum origination fee may rise from 4% to as much as 5% of the amount borrowed; the fee is paid over the loan's life, which can be as long as 30 years.

Students take out Stafford Loans from either private lenders--banks, credit unions or savings and loans--or directly from the government if the school participates in the Federal Direct Student Loan Program, which supplies about 30% of federal education loans. Loans from private lenders, made under the Federal Family Education Loan Program (FFEL), require more paperwork than direct loans. However, if the private lender sells its loans to the Student Loan Marketing Association (Sallie Mae), your child can end up paying 2E percentage points less in annual interest than he or she would with a direct loan. Here's how the savings add up: Sallie Mae will cut your child's rate two percentage points after the first 48 on-time payments. He or she can lower the rate an extra quarter of a point by authorizing that the payments be made automatically from his or her bank savings or checking account. Additionally, the company will forgive loan-origination fees above $250 after 24 prompt payments. To get a list of lenders who sell their loans to Sallie Mae, your child must call his or her state guarantee agency. You can obtain the telephone number through the Federal Student Aid Information Center (800-433-3243).

Repayment schedules for direct and indirect Stafford Loans are virtually the same. While interest starts accruing the day the money is borrowed, the student doesn't have to begin repayments until six months after graduation. Borrowers can, however, start making interest-only payments immediately, which will reduce the amount owed after graduation.

Both programs offer four repayment options: 1) Pay the same amount each month for up to 10 years, 2) pay the same monthly amount for up to 30 years, 3) make graduated payments that start out small and grow over the loan's 30-year life or 4) pay a percentage of income--typically 4% to 15%--for up to 25 years. Borrowers can switch plans after they start making repayments. "Just remember, while there is flexibility, the longer you're paying, the more the loan will cost you," says Patri cia Scherschel, a loan-repayment specialist for USA Group, a student-loan administrator in Indianapolis. Her advice: "Choose as aggressive a plan as you can afford."

To lower your child's debt load, you can take out a federal PLUS Loan (1995-96 rate: 8.98%) through a private lender or directly from the government, depending on whether the school participates in FFEL or the direct-loan program. PLUS Loans are available to parents with good credit ratings, whether or not their children have Stafford Loans. With a PLUS, you can borrow all your child's education costs, minus any other financial aid. For example, if your child has a $2,000 Stafford Loan for college costs of $5,000, you may qualify for a $3,000 PLUS Loan.

The loan's rate equals that of a one-year T-bill plus 3.1 percentage points, with a 9% cap. The loan often costs at least three percentage points less than a typical personal loan. Maximum origination fees--4% to 5% of the loan, contingent on the final congressional plan--are paid over its life. Repayment starts 60 days after you borrow. An FFEL PLUS Loan must be repaid within 10 years with monthly payments of at least $50. Under a direct PLUS, your loan can be carried over a 10- to 30-year period, with the monthly tab varying according to the repayment schedule.

Applications for Stafford and PLUS loans are available at college financial aid offices. If the college does not participate in the direct-loan program, your son or daughter can call your state guarantee agency to find a private lender.

Another low-cost option worth considering is a home-equity line of credit (recent average interest rate: a tax-deductible 8.5%). Typically, you can tap as much as 80% of the equity in your home as you need money, and monthly repayments can be as low as 1% of what you owe. Remember, though, that if you miss payments, you risk losing your house.

If you plan to borrow against your home equity as well as apply for other loans or need-based financial aid, get your home-equity line of credit first. Reason: It's easier to qualify for the credit line when your monthly debt payments are low--preferably, less than 40% of pretax income. Also, while the formula for federal financial aid excludes your home equity, the college may take it into account in parceling out aid from its own funds. Since a credit line reduces your equity in your home, the loan may increase your chances of qualifying for aid.

You can also borrow the full cash value of a life insurance policy (typical annual interest: about 7%), but if you die before you repay the loan, the balance plus interest will be deducted from the amount your beneficiaries are due.

Finally, you can borrow against your 401(k) retirement account or your profit-sharing plan. Generally, the loan can be for as much as half your vested 401(k) balance but not more than $50,000. You must repay the money in five years at the interest rate set by your plan-typically the prime rate (recently 8.8%) plus one percentage point-or the loan will be treated as a withdrawal on which you will owe regular income taxes and a 10% penalty if you are under 59E. "Consider this a last resort," says Osofsky, "not only because you may end up owing taxes and a penalty but also because you invested the money so it would be there when you retire. You don't want to move away from that original goal."