The federal government may have changed the rules on college loans, but unfortunately, Uncle Sam is no better than King Canute when it comes to stemming the tide of college costs: They keep rising, and many parents will be swamped as they try to pay for their children's higher education.

According to the College Board, average total costs for 2009-2010 were $35,636 at private universities and $15,213 for in-state students at state colleges. The 2010-2011 averages aren't available yet, but these costs have been rising by about 5% a year. Many top institutions have announced that total charges will top $50,000 in the current academic year. To cover such costs, families may have to use current income, tap savings and borrow money.

DIRECT ACTION
Perhaps the most important change occurred last month, when all federal student loans became direct loans, originated by the U.S. government. Previously, most colleges participated in the Federal Family Education Loan (FFEL) program. Eligible students at those schools would get federally guaranteed student loans through a bank or another lending institution.

"That changed, as part of the healthcare legislation that was signed into law this year," says Patrick Kandianis, co-founder of SimpleTuition in Boston, a student loan comparison site. "Now all federal loans will originate in the Direct Loan program." That includes Stafford loans for undergraduates as well as PLUS loans for parents and graduate students. These loans will come directly from the federal government, no matter which school the student attends.

Kal Chany, president of Campus Consultants, a financial aid counseling firm in New York City, says that now students won't have to shop around to find a lender, as they did with the FFEL program. "After they have a loan they won't be dealing with different entities-a lender, a guarantor, a servicer-as they might have had to do with FFEL loans."

Otherwise, the federal student loan process hasn't changed much. Students who fill out the Free Application for Federal Student Aid (FAFSA) can get Stafford loans. Interest rates are fixed, usually at 6.8%, while students with financial need might get subsidized Stafford loans, with fixed rates of 4.5% for new loans. As before, all Stafford loans are made to students, with no credit check required.

Stafford loans have the same limits as they did last year. Freshmen can borrow no more than $5,500, sophomores no more than $6,500, and upper-class undergrads no more than $7,500. With PLUS loans, which require credit checks, borrowers can receive the difference between the cost of attending a given school and the amount of financial aid. If Carrie Smith attends a college where the total cost is $50,000, for example, and gets a $20,000 financial aid package, her parents can borrow up to $30,000 with a federal PLUS loan. All PLUS loans now have a fixed rate of 7.9%, because they're direct loans. PLUS loans made under the FFEL program have an 8.5% fixed rate.

Now that the money is coming from the federal government, Stafford and PLUS loans are expected to be available up to the stated limits for all qualified applicants. "There should not be any major disruptions due to the expansion of the Direct Loan program," says Mark Kantrowitz, publisher of FinAid.org. "The Department of Education has handled rapid growth in the Direct Loan program over the past two years without problems."

PRACTICE PATIENCE
The new healthcare legislation also permits in-school consolidation of all federal education loans. Although combining different types of loans may make it easier for students to handle the paperwork, Kantrowitz advises students to wait to consolidate until after graduation. "There's no real financial benefit to an in-school consolidation, and borrowers will lose their six-month grace period if they consolidate," he says. In other words, most borrowers can wait half a year after they leave school before loan repayment begins, but that opportunity won't be available after an in-school consolidation.

Also in the new healthcare law: The maximum amount for Pell Grants was increased from $5,350 to $5,550. Need-based Pell Grants typically go to students from low-income families.

Before taking over the student loan program in 2010, the federal government launched a program in 2009 designed to help some borrowers with the debt burden: income-based repayment. Now students who expect to be in low-income careers can take out federal student loans with fewer worries about future cash flow.

For example, assume Luke Anderson graduates from college with $30,000 in federal student loans. With a standard 10-year repayment schedule and a 6.8% interest rate, Luke would repay the loan at $345 per month, or more than $4,000 a year.