(MONEY Magazine) – You've repeated the mantra since the kids were in diapers: Save for college, save for college. Oh, you didn't accumulate enough? Join the club. "Out of the more than 50,000 families we've worked with, only 12 had saved enough to pay all their college bills," says Raymond Loewe, a financial adviser with College Money in Marlton, N.J. He adds, "If you can save about one-third of the costs, then you can reasonably expect to make up another third through current income and financial aid." And that last third? That's where loans come in.

Last year, the average parent took out $7,000 in loans through the federal PLUS program (Parent Loans for Undergraduate Students). Borrow that amount four years in a row, and you'll spend the next 10 years repaying a total of $43,000, including principal and interest, at $355 a month. And that may be just for one child--and just for the undergraduate years. The average graduate student comes out saddled with more than $25,000 in debt; professional degrees--business, law or medicine--can result in loan burdens of $50,000 to $100,000 and more. That's fine if your child becomes a neurosurgeon, an associate at a top-tier law firm or a Fortune 500 brand manager, but what if that sociology degree doesn't pan out?

Make no mistake, a college education is a worthy cause to go into debt for--and not just for parents but also for kids. Many college advisers say that letting the child share the load makes sense, for both financial and emotional reasons. "It's important for a student to have a financial stake in his or her college education," says Brad Barnes, an adviser in Denver. What's more, lower interest rates and the promise of deductible interest when it's time to repay often make loans to students better deals than loans for parents.

But it's easy for borrowers of any age to assume too much debt--even good debt. You need to figure out ahead of time the maximum that you and your child can comfortably borrow. Above all, you want to avoid raiding your retirement stash to repay loans. Here, then, is how to figure out how much you and your child can afford to borrow for college, choose the best deals and select a smart repayment plan.

Analyze your own finances

As always, the earlier you get started the better--ideally, well before college application madness begins. Your first step is to get a rough estimate of your expected family contribution (EFC), the amount that colleges deem you can afford to pay; several websites feature EFC calculators (see the box on page 131).

Next, scrutinize your budget to determine how much cash you can spare without derailing your retirement savings, as well as the total you can afford to borrow. As a rule, financial advisers recommend spending no more than 35% of your after-tax income on all debt payments, including mortgages, personal loans, credit-card balances and any college debt you take on. To find your limits, fill out the worksheet at right.

For example, assume your family has a household income of $100,000. After state and local taxes, that would mean a take-home pay of roughly $5,400 a month. Using the 35% maximum, you could safely spend $1,900 a month on debt. Let's say your mortgage payments are about $1,200, your auto lease runs about $400 and you have no other debt. That would leave you with $300 a month for paying off college loans.

With a PLUS loan, which has a maximum rate of 9%, you could afford to borrow a total of $40,000 over four years--more if your income jumps substantially. If you have two or more children to put through school, that borrowing power will have to be divided.

Give your child a role

First, make sure your child understands the financial facts well before he or she begins filling out applications. Since 1980, tuition costs at both private and public universities have more than doubled. At the same time, financial aid has increased by only 74%, according to the College Board. Be as specific as possible about what you can do to help, whether it's "we can chip in $10,000 a year," or "we'll pay for a private college, but graduate school will be up to you."

Then discuss how to split the debt load. There are three basic options: Borrow the entire amount yourself, allow the student to take out all the loans or share the burden. Your choice will depend on your financial situation and your personal values. But there are some important points to consider.

For starters, as we noted earlier, there are sound financial and psychological reasons to have students pay for at least part of their own education. They are eligible for lower-cost loans and are more likely to be able to deduct interest payments (more on that below). Even if you want to spare your child any debt repayments, you might do better to let your son or daughter borrow now, at a federally subsidized rate, and help him or her pay off the loan later.

Figuring out how much your child can afford to borrow is a far less precise process than coming up with your own number. Financial advisers urge that students borrow no more than 8% to 10% of their expected take-home pay. And just how do you calculate your 18-year-old's future take-home pay--assuming he or she even has a career in mind? One key indicator is the average starting salary for new college grads, which last year came to $37,194 (take-home pay: about $2,200 a month). That's enough to support a maximum debt of about $25,000, assuming an 8.25% rate and 10-year repayment plan. You can find information about starting salaries and careers at websites like Salary.com; for loan-payment calculators that let you determine the salary you would need to finance different debt levels, check Finaid.com and Knowledgefirst.com.

As Greg Phillips, a Pittsburgh financial aid adviser, points out, "A student who is unsure about a career, or who is leaning toward a low-paying profession, should be very conservative about taking on debt." For example, the average beginning teacher, with a salary of only $26,639 (take-home pay: $1,500 a month), could comfortably finance about $18,000 in loans, tops.

A student who's aiming for a specialized career, on the other hand, may feel confident about taking on a larger debt. Michael Goldschmidt, for one, has few worries about borrowing nearly $40,000 over four years. The 19-year-old freshman chose St. Joseph's University in Philadelphia for its highly regarded food-marketing program. "Many top corporations recruit here, and the school has a great job-placement office," says Goldschmidt, who intends to become a sales executive. "I'll be able to land a high-paying job, so my loans aren't too big a concern." Recent grads from Goldschmidt's program received job offers right out of school with an average starting salary of $35,000.

But youngsters' career plans can fall through--not an uncommon scenario. Take the case of Raquel Soto, 19. In 1998, Northwestern University awarded her about $30,000 in aid, including more than $20,000 in grants, with the rest in loans and work/study. Even so, debts began to pile up. To meet a premed requirement, Soto took a $6,000 summer chemistry course; at the end of her sophomore year, she owed $13,000. Then, like many premed students, she decided not to become a doctor.

By the time Soto graduates, she'll probably owe about $20,000, which she'll have to repay without help from her family. She's switching her major to liberal arts, and graduate school (a master's in what, she doesn't yet know) looms. She's moved off campus to cut costs and talked Northwestern into a more generous aid package for the coming year. "I wasn't nervous about my loans before, but now I am," Soto says.

Leave no loan option unturned

Interest-rate hikes last year pushed many federal loan rates close to their legal maximum. So it's more important than ever to get the best possible deal.

For students, a variety of low-cost federal loans are available. The most attractive are two designed for students who are deemed to need substantial financial help. The best is the Perkins loan, with a super-low 5% interest rate. To qualify, your child must be considered to have high financial needs in comparison to other students applying to a particular college; at expensive schools, even kids from families with household incomes of $60,000 or more may be eligible, says Kal Chany, a New York City financial aid adviser and author of Paying for College Without Going Broke.

Next up is the subsidized federal Stafford; no interest is charged until six months after the student graduates (maximum rate: 8.25%). A student who does not qualify for a Perkins or a subsidized Stafford can take out an unsubsidized Stafford, also at 8.25%. Interest begins accruing immediately, but payment can be deferred until six months after graduation.

For parents, the place to start is probably a home-equity line of credit, which allows you to borrow 50% to 80% of the market value of your house. For college borrowing, says Alan Posich, a college adviser in Albuquerque, "a home-equity credit line is usually preferable to a home-equity loan, because you can take out only what you really need." Although average interest rates are higher than those charged for most federal loans, the better deals have recently been as low as 6%--plus the interest is fully deductible. If you intend to apply for other loans or for need-based financial aid as well, 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.

As we noted earlier, federal PLUS loans have become an essential college financing tool, and they are often the best deal for parents after home-equity loans. With a PLUS, parents may borrow the full cost of college, minus any other financial aid (maximum rate: 9%). Repayment begins 60 days after you receive the loan. You must pass a credit check, though it's less stringent than the process for a mortgage. You must not have an adverse credit rating, such as an outstanding judgment or a record of late payments.

Private loans--offered by banks and other organizations--are a fast-growing alternative, with volume last year hitting $3.8 billion, up from just $1.3 billion four years ago. These loans are best suited for parents who do not qualify for a PLUS, or for students who don't qualify for subsidized loans but whose families cannot or choose not to borrow on their behalf. Since there is no cap on rates, you will probably pay more, typically 10% to 12%, and repayment plans may be less flexible. So be sure you have explored all other aid options first. Many colleges now have their own alternative loan programs for both students and parents that often, but not always, offer attractive rates.

Whatever loans you and your child choose, be aware that it's nearly impossible to walk away from a student loan. "Congress has tightened rules to make it very difficult to discharge loans in the cases of financial hardship, even if you are in bankruptcy," says attorney Deanne Loonin, who is updating Take Control of Your Student Loan Debt (Nolo).

Put any aid offer under a microscope

Before you or your child commit to any loan, be sure you understand exactly how much money you will have to raise. If your child gets an offer of financial aid, scrutinize the letter carefully. Some schools, notes Bruce Hammond, author of Discounts and Deals at the Nation's 360 Best Colleges, list PLUS loans as part of the college's financial aid package even though the money is coming straight out of your pocket. Others list the student's grants and loans without making it clear how much the family has to pay. For help, you can use tools on the Web (see the box at right) to analyze your award and compare offers. (And, of course, if the aid offer from your child's first-choice school is too low, don't be afraid to ask for more.)

Choose the right repayment plan

Once your child graduates, he or she generally has six months to find a job and start paying back student loans. With parents' PLUS loans, repayments begin almost immediately. So don't wait to sort through the different payment plans.

A federal loan, such as a Stafford or PLUS, has four basic options. Standard payment plans call for equal monthly installments. That's the option used in our worksheet and the one that is cheapest in the long run. It is generally the best choice for parents, says Kal Chany. Few of us can afford to pay thousands of dollars of extra interest on college debt and also meet our retirement savings goals.

The other options offer flexibility--at a price. Stretching out the installments on a $10,000 loan at 8.25% from 10 to 30 years, for example, cuts the monthly bill to about $75 from $122 but costs nearly four times as much in interest: $17,041 vs. $4,718. Even so, extended- payment plans may be the most reasonable choice for students with modest starting salaries whose income can be expected to increase appreciably in the future. Graduated plans let payments start low and step up over time; extended plans lower monthly payments by lengthening the repayment period; income-sensitive plans gear payments to salary levels.

With most federal financing, you also have the ability to consolidate all your different loans into one bundle, often with lower monthly payments than before. The catch, again, is that you'll pay a lot more in interest over the longer life of the loan. Private loans typically provide fewer repayment options, though some now offer consolidation plans.

There is a modest bright side to repaying college debt: Tax rules allow you to deduct a portion of the interest, as much as $2,000 for the 2000 tax year and up to $2,500 for 2001 and beyond, during the first 60 months of the repayment period. This is probably a better deal for your child than for you, because borrowers must meet stringent income limits to take the full deduction--no more than $40,000 for singles and $60,000 for married couples filing jointly. (The deduction phases out completely when income reaches $55,000 for singles and $75,000 for joint filers.)

Of course, the smartest strategy is to prepay the loans if you can. Opting to send in just $25 more a month on a 10-year, $10,000 PLUS loan will cut your repayment period to 7.7 years and save you more than $1,000 in interest. All federally guaranteed education loans and many private loans can be prepaid without a penalty.