By Michelle Hatfield

May 13, 2007 (McClatchy-Tribune Business News delivered by Newstex) --

EDITOR'S NOTE: This is the second installment in a series featuring how students foot the bill for their college degree.

Over the next several months, The Bee will follow five local college students to show how they pay for college, whether it's competing for scholarships or grants, working at on-campus or off-campus jobs, relying on help from their families, or taking out loans. They'll open their books so we can see how they manage the costs. Today's story focuses on loans -- the types that are out there, why they're becoming a "necessary evil" -- and advice from students and financial aid counselors. Of the series's five students, two have taken out loans.

Devonte Ruff took out his first loan this year -- $3,000 through Wachovia (NYSE:WB) to help pay his rent.

Tuition, textbooks and fees are "mostly taken care of" through grants and scholarships, said Ruff, who's studying biology for a career as a surgeon.

"I was afraid," said the University of California at Merced sophomore. "Mymom took out a loan for my sister and my sister didn't finish college. It took my mom a long time to pay it back. You have to just go ahead and do it. I'm going to be in school a really long time. "

More and more, loans are becoming a "necessary evil" for students and their families as the price of attending college rises and grants haven't increased enough to keep up.

Interest rates range from 3 percent to 6 percent for federal student loans and can be as high as 10 percent from private lenders.

Students and their families use a combination of sources to pay for college. On average, 35 percent comes from federal loans, 25 percent from grants and scholarships, and 20 percent from working, according to Tamera Briones of Education Finance Partners, a private student loan company based in San Francisco.

The remaining 20 percent leaves students and families scrambling to cover the gap with private loans.

U. S. college tuition has increased 59 percent in the past decade. Family income has increased 2 percent over the same time, Briones said.

"Borrow only what you actually really need to stay in school," advised Tom Tompkins, financial aid adviser at California State University, Stanislaus. "You can always ask for more down the road. "

Loans are Diana Ralls' least favorite subject.

"No one likes loans; they are debt," said Ralls, financial aid director at University of California at Merced. "But they have become reality. "

$15,000 average loan debt

Loans usually are a last resort for families after students receive all the grants and scholarships they're eligible for (and don't have to pay back). Anyone attending college can apply for loans.

More than one-third of U. S. college students took out an average of $5,600 in loans for the 2003-04 school year, the most recent data available from the National Center for Education Statistics.

The average California student graduates with $15,000 in loan debt, according to a 2006 report by The Project on Student Debt. Students and counselors emphasize the debt is worth it in the long run. Adults with a bachelor's degree earned an average of $22,909 more per year than those with high school diplomas in 2004, according to the U. S. Census Bureau.

"What I tell students is, investing in your education is the best debt you can take on," Ralls said.

Loans take a few forms:

Stafford and Perkins loans from the federal government come subsidized (the government pays the interest) and unsubsidized (the student is responsible for the interest). Interest rates are lower than for private loans, but loan amounts are limited to between $3,500 and $6,000 per year. Eligibility is based on financial need.

Parent Loans to Undergraduate Students is a federal program that allows parents to borrow money for their child's education. Parents can borrow up to the annual cost of college.

Alternative loans are offered by private lenders and have higher interest rates. Popular lenders include banks such as Wells Fargo, Bank of America (NYSE:BAC PRZ) (NYSE:BAC PRA) (NYSE:IKR) (NYSE:IKM) (NYSE:IKL) (NYSE:IKJ) (NYSE:BAC) and Citibank and companies such as All Student Loan Corp. (NYSE:STU) There is no limit to how much students can borrow under private loans.

With more than 2,500 loan companies making their pitches, students and their parents can find themselves lost deciphering which ones are best.

"Talk to people who have loans, see what it was like for them," Ruff suggested. "That's what helped me the most. "

That's how Ruff settled on Wachovia -- his friend used the company and had a positive experience. When he asked UC Merced's financial aid officials, Ruff said, they told him it was his choice.

Has one loan, hopes that's it

UC Merced sophomore Brenda Ramirez took out a $1,600 loan her freshman year to help pay her dorm rent. Ramirez is studying psychology.

She didn't borrow money this year and said she hopes she won't need to again. Ramirez has earned independent financial status from her mom and should receive a little more financial aid next school year. Living off campus with roommates also is cheaper.

"I stress about it," said the first-generation college student. "$1,600 is a lot, especially since I'm on my own. I think it's something that students stress about. But it's a good investment. I'm sure I'll be making more than $1,600, and it's not like it'll be one huge payment. "

Students usually have six months after graduating to start making payments on their loans. Depending on how much they pay each month, students can take decades to pay back the money.

If students decide to take out loans, they need to make sure their future job pays enough to repay the money, counselors advise. For example, someone on a teacher's salary or graduating with an art degree might have a tougher time paying off their debt than would a doctor or lawyer.

Loans are not just for low-income students making ends meet. Higher-income students and parents take out loans at about the same frequency, usually to maintain a certain lifestyle, according to counselors.

"It's all over the board," Ralls said. "Students are happy; they're investing in their education instead of buying a car. Other students are absolutely unwilling. They will not take on the debt and will have their parents borrow for them. "

With the price of college increasing and fiercer competition among loan companies, many lenders are bypassing their traditional ties to financial aid offices and going directly to students and their families.

Students are urged to use the free resources at their college or high school financial aid office. Even though students do more research online and private lenders are targeting families, financial aid counselors said they have more experience and offer unbiased advice. Campuses also have preferred lender lists where companies are scrutinized for the best student deals, Ralls said.

"A scam can look very close to the real thing," Ralls said. "With direct marketing, the offer may not be the best loan. "

Private student loans total $17. 3 billion, having grown at an average annual rate of about 27 percent from 2000-01 to 2005-06, after adjusting for inflation, according to the College Board.

Without guidance from UC Merced's financial aid office, Ramirez said, she would have been lost. "I wouldn't have known how to go about looking for a loan company and which ones are the best. "

Thorough research advised

Regardless of which loans students choose, they should be up to speed on the specifics, including the amount, interest rate, which loan company they're borrowing through and when they must start repaying the loan, counselors said.

When UC Merced students agree to borrow, they must take an online loan survey by EdFund that tests their knowledge of the rights and responsibilities of borrowers.

"There's so much paperwork they're filling out when they're going to college, we want to make sure they understand what this is," Ralls said.

Students should research loans thoroughly and ask a lot of questions, students and counselors agree.

"It's still a matter of paying back the loan. As long as you can handle it, you should be OK," Ruff said. "It's a very important decision, as important as buying a house or car. It's just as big. "

To comment, click on the link with this story at www. modbee. com. Bee staff writer Michelle Hatfield can be reached at mhatfield@modbee. com or 578-2339.

Newstex ID: KRTB-0125-16680119