A new survey by the Smith College Women and Financial independence program found that 23% of students are using credit cards to pay for tuition and fees. More than half said they used credit cards to buy textbooks and school supplies.

 

Some parents may find that news comforting, but they shouldn't. Students who use credit to pay for tuition risk graduating with a boatload of high-interest debt that could take decades to repay. About a quarter of students who paid tuition with a credit card had debt of more than $5,000, vs. 11% of students who used their cards for other purposes, says Mahnaz Mahdavi, professor of economics at Smith. "That's a number that is rather alarming," she says.

With tuition costs rising, many students are struggling to pay the bills. But, "Other than going to a pawnbroker or a payday advance place, credit cards are probably the most expensive source of money for students in college in terms of interest and fees," says Chris Chapman, chief executive of ALL Student Loan.

Some better alternatives:

 

\u2022 Federal Stafford loans. These loans are provided by private lenders or through the federal Direct Student Loan Program. Students can defer payments on the loan until they graduate. When students start making payments, they may be able to deduct some of the interest from their taxes.

The interest rate on Stafford loans, which is adjusted every July 1, is 4.7% for borrowers who are still in school. Freshmen can borrow up to $2,625.

It's not too late to apply for a Stafford loan, even for students starting college this fall, Chapman says. Students who have already filled out the Free Application for Federal Student Aid can usually get a loan in a couple of weeks, he says. If you haven't submitted a FAFSA, it will take longer. Talk to your school's financial aid office for details.

 

\u2022 Parent Loans for Undergraduate Students loans. The biggest drawback to Stafford loans is the limit: For students attending high-cost schools, $2,625 probably won't cover first-year bills. But parents can help fill the gap by applying for a PLUS loan. Parents can borrow any amount not covered by the student's financial aid, up to the full cost of attending college.

The interest rate on PLUS loans issued from July 1 to next June 30 is 6.1%. Parents have up to 10 years to repay the loan. If parents are reluctant to take on the debt, students can agree to make the payments. However, parents will be held responsible for the payments if the student falls behind.

 

\u2022 Tuition payment plans. Many colleges offer programs that allow families to spread tuition payments out over the course of the school year. These programs, which usually charge a small fee, are useful for families with uneven incomes. Your financial aid office can provide more information.

 

Students who are using credit cards to pay for college probably aren't doing it to rack up frequent-flier miles. More likely, they may not know there are better ways to borrow. Of students surveyed by Smith College, 55% said they had never taken a course about personal finance or economics. And most said they got information about finances and loans from friends and relatives, rather than financial professionals or their school's financial aid office.

The lack of education extends to parents. A recent survey by student loan provider Sallie Mae found that nearly 42% of parents had never heard of a PLUS loan.

 

There is some good news about college students and credit cards. The average undergraduate's credit card balance was $2,169 in 2004, down 7% from 2001, according to a survey by student lender Nellie Mae.

Still, a lot of students are getting in over their heads. Only 21% of students surveyed by Nellie Mae pay their cards off every month; 44% pay more than the minimum but always carry a balance; and 11% make less than the minimum payment on some or all of their credit cards.

 

That's a troubling statistic because an overdue payment can trigger punishing late fees and cause your interest rate to skyrocket. Unmanageable credit card bills will also wreck your credit record, jeopardizing your ability to get a car loan, apartment and even a job.  Once you graduate, says Robert D. Manning, Professor of Finance at Rochester Institute of Technology and author of Credit Card Nation, your credit report "is ultimately more important than a grade point average."