Paying for College

Student Loans

You are far from the only one who is borrowing money to pay for tuition, room, board and fees. Nearly seven of ten students graduating from public or nonprofit postsecondary educations used loans to pay for their education as of 2013, according to The Institute for College Access & Success. Before you take on a student loan, make sure you understand how they work and explore all your options.

Student loans come from four types of organizations: the federal government, state governments, private organizations and the schools themselves.

Federal Loans

Federal financial aid eligibility is determined based on student and family information provided on the Free Application for Federal Student Aid (FAFSA) and considered for both subsidized and unsubsidized loans available to students and parents. Loans subsidized by the federal government enable students to use the funds interest-free until they leave school. Unsubsidized loans begin accruing interest as soon as the money is disbursed to the student. Frequently tapped federal financial aid options include Stafford , Perkins, and PLUS loans.

State

Many states offer special loan programs administered by the State Department of Education. Each state sets its own rules. If you complete the FAFSA you might automatically be considered for state loans, under some state plans. You might also have to complete a state form.

Private Loans

Banks and lending institutions lend their own money to students and parents. Private loans are often used to cover financing gaps when federal and state loans, and other types of financial aid, do not cover the amount you need. Because these loans are typically offered at a higher and sometimes fluctuating interest rate, students should try to exhaust other options before turning to private lenders. Private loans typically require a credit check. Few high school graduates have substantial credit histories, so many private loans require an additional promise to repay by an adult with an established credit history. That’s why your parents might be asked to co-sign a loan you expect to pay back.

Institutional Loans

Some postsecondary institutions lend their own money to help students cover remaining costs after financial aid and personal funds have been used. Schools manage these loan programs on their own, so students interested in this type of funding should speak directly with the office of financial aid to determine interest rates, repayment options, and lending limits.

Repayment Options

Because different loans have different repayment plans, it is imperative for students to fully understand their loan options before signing the dotted line. Picking the right student loan on the front end can save years of headaches when it comes time to repay them. Check out the table below for some of the most common repayment options for federal loans. Some state, institutional or private loans may offer some of these repayment options as well. Not all repayment options are available for all types of loans.

Standard Repayment

Graduated Repayment

Extended Repayment Plan

Income-Based Repayment

Pay As You Earn Repayment

Income Contingent Repayment

Students pay a fixed amount of at least $50 per month. The loan is repaid within 10 years.

Former students start with low payments that gradually increase every two years until the loan is fully paid. Students have up to 10 years to repay the loan.

The monthly payments can be fixed or increase gradually. Students have up to 25 years to repay the loan.

Graduates pay a maximum amount of 15 percent of their discretionary income, with payments increasing proportionate to income growth. Students have up to 25 years to repay the loan.

Graduates pay a maximum amount of 10 percent of discretionary income, with payments increasing proportionate to income growth. Students have up to 20 years to repay the loan.

Graduates pay an amount calculated each year and based off adjusted gross income, family size, and the amount of loan debt. Students have up to 25 years to repay the loan.

Here are some illustrative examples of the payment options for recent graduate students who took out 20,000 in subsidized loans and $10,000 in unsubsidized loans.

Scenario A

Fixed Monthly Repayment

JOHN, 22

also earns $26,000 per year but chose to pay a fixed monthly amount that would allow him to be debt-free in 10 years.

His loan’s fixed monthly payment: $345.
He will have his loan paid off by age 32.

Scenario B

Pay as You Earn Repayment

AUDREY, 23

elected to use the “pay as you earn” plan after graduating college.

First year loan monthly payment: $70.
After 20 years her monthly payment reached $308 per month.
At this point, she received 100 percent loan forgiveness for the remaining amount, totaling $11,124.

Scenario C

IBR & PSLF

SARAH, 21

works in nonprofit administration and has an adjusted gross income (AGI) of $26,000 after college.

Her loan’s monthly payment: $115.56.
If her AGI increases to $37,000 over a 10-year span: Her payments would max out at $168.05 per month.
At the end of 120 payments, the remaining balance on her loans is forgiven through the public service loan forgiveness program.

Grants & Scholarships

Scholarships and grants are available to all sorts of promising students, not just valedictorians and star athletes. Loans must be paid back, but scholarships and grants are essentially gifts. Organizations, philanthropies and schools are looking for diverse students across a wide spectrum of interests and potential, including:

Students in underrepresented and in-demand categories of study, such as STEM (science, technology, engineering and math)

2. Ethnic minority students

3. Female students

4. LGBTQ students

5. Students demonstrating a commitment to community service

6. Students entering caring professions such as social work, nursing or healthcare

7. Students pursuing creative endeavors

Tips From a Student

To get a better sense of the steps involved in receiving a scholarship or grant, we interviewed Hailey Reynolds, a recent graduate who took advantage of a state-based scholarship while earning her undergraduate degree. Reynolds completed her degree in elementary education, making her eligible for scholarships focused on encouraging more teachers to enter the field. Here’s what Hailey had to say:

How did you first hear about the scholarship you received?

The award I received, the Hope Scholarship, is a Tennessee-based scholarship that my high-school advisor told me to look into. Trying to understand all the applications while also finishing high school and applying to college felt really overwhelming, but she really guided me through the process well.

What was the application process like?

It was actually very easy as recipients are chosen based on their FAFSA application. I had to submit my ACT scores and high-school GPA, prove my residency, and show that I was attending a Tennessee university, but otherwise it was really easy.

Did you have to do anything to keep your scholarship throughout college?

I had to maintain a set GPA throughout college and I also had to fill out the FAFSA for each academic year. This scholarship actually increases in your last two years of college, so it didn’t feel like a huge chore!

What advice do you have for students hoping to receive a scholarship or grant?

Start looking early and apply early. A lot of scholarships are on a rolling basis, meaning students who get their applications in may receive all the awards if they are qualified. Take advantage of any advisors in your high school or even call the financial aid office at the schools you are considering. If you’re applying for a specific degree, there may be a number of departmental scholarships or even a list of scholarships relevant to that program.

Part-time or Full-time Employment

Your employer might cover part of your tuition. The National Center for Education Statistics recently found that 8.3 percent of undergraduate and 21.9 percent of postgraduates took advantage of employer programs, totaling nearly $9 billion in education subsidies.

The most common type of assistance allows employers to provide students, regardless of their education level, with a yearly maximum of $5,250 in tax-free benefits. Employers may be allowed to contribute above this amount if they can show that the education is a working condition fringe benefit. In other words, employers must demonstrate that the education of that employee is a business expense and will directly result in the student gaining, improving or maintaining skills directly related to the job he or she holds. This explains why many employers pay for staffers to earn master’s degrees in business administration (MBA).

Check the employee handbook and talk with the human resources department to understand if, how much, and how the company offers tuition reimbursement. Be sure to ask about minimum grade point averages or other conditions for being fully reimbursed for tuition. Be sure to find out if tuition reimbursement must be repaid if you leave that job within a certain period of time — in other words, if you must give back the reimbursement if you quit your job shortly thereafter.

Federal Work-Study Programs

Students have federal work-study jobs at more than 3,400 campuses across the country, according to the U.S. Department of Education. The average new award was $1,642, as of 2011, disbursed through an hourly rate paycheck paid each month. Students find out if they are eligible for this type of financial aid when filling out the FAFSA, and their eligibility status must be renewed with a new FAFSA each academic year.

Those who qualify usually are assigned campus-based jobs, including positions in the campus library, bookstore, student center, cafeteria, sports center, or residence halls. Some universities also have partnerships with off-campus organizations as a way of providing public service.

Pros

Flexible hours allow students to fit work into their busy schedules, sometimes working only an hour or so between classes.
Depending on the nature of the work, students can do homework during quiet times.
Students without cars can earn money on campus without worrying about transportation.
Work-study funds are earned and don’t have to be repaid.

Cons

Students, especially in their first or second years, can sometimes struggle to balance the demands of the classroom with the responsibilities of a job.
Work assignments may not be at all related to their interests.
Other common student jobs, such as serving, may offer more money.
Students can work a maximum of 19 hours per week; they may earn the total amount available before the academic year ends.

Contributions from Family, Friends & Strangers

Many families save for college expenses. A few programs make it easier to do that, but also put conditions on how students can spend the funds for college.

529 plans

Through a 529 plan, a family (or, theoretically, anyone) is not taxed on money saved for future college expenses. These accounts are similar to 401(k) retirement savings accounts, as contributions are invested by a professional fund manager in mutual funds or similar investments.

Here’s an example of how a 529 plan might work:

When Elyse was born, Olivia and John put $5,000into a 529 plan to start her college savings account.
Each month, they contribute $200 to the fund.
Without any financial aid or scholarships, Elyse’s tuition and fees would be approximately $130,000.
By starting to save when she was born and assuming a six percent average annual rate of return, Elyse’s 529 account will accumulate more than $110,000 by the time she heads off to college.

Savings Bonds

Two types of U.S. savings bonds, the Series EE and the Series I , can be used to pay for college tuition and fees. Both types allow the owner to redeem the interest grown as tax-free for both federal and state income taxes in some cases. The biggest criterion revolves around the modified adjusted gross income (AGI) of the bond owner. For individuals, tax exclusion amounts are reduced for AGIs over $76,000 and eliminated for AGIs over $91,000. For joint filers, the exclusion reduction begins at $113,950 and is eliminated at $143,950.

The maximum annual investment in a qualifying U.S. bond is $10,00 per year, per owner, per type of bond. These bonds can be redeemed after as few as 12 months, but their point of maturation is 30 years.

Here is an example of how a savings bond works:

Maxwell began is freshman year of college in the fall of 2015.
When he was born, his parents took out a Series EE bond, paying $5,000.
Over the last 17 years, this bond has been accruing interest at the rate of 1.27 percent.
When Max headed to college, they redeemed the bond for $10,196.

Online Crowdfunding

Though crowdfunding websites have historically been used to raise money for business ventures, creative projects, nonprofits, or emergency/crisis relief, innovative students are using the platforms to help offset the ever-rising costs of a college education. While it takes humility to ask friends, family, former teachers, and even strangers for funds, the most successful supplicants show how they plan to use their educations to make a lasting impact in the world. According to GoFundMe, a leading crowdfunding website, more than 107,000 education-related campaigns raised funds in excess of $13 million in 2014.

Some of the top crowdfunding websites include:

Benefits for Military, Teachers, Public Service & Other Specialized Groups

Military service and other special circumstances can deliver student financing benefits, depending on circumstances and the student’s field of study. Each type of program comes with its own requirements, so be sure to check out all the details; don’t assume that education benefits will come automatically.

Military Personnel

Each branch of the military, including the National Guard and the Coast Guard, offer student loan forgiveness programs ranging from $10,000 to $65,000 in total loan debt relief. There is also the National Defense Student Loan Discharge Program, which offers loan forgiveness arrangements to students who completed a one-year deployment to a hostile or active war zone.

Teachers

With the need for teachers rising each year, a number of loan forgiveness programs for future teachers were created to attract new teachers. TEACH Grants provide up to $4,000 annually for students completing bachelor’s, master’s, or teaching credential programs, provided they plan to teach in schools where the need for good teachers is high. Federal Perkins loans qualify for loan forgiveness if the teacher plans to work in a low-income community, teach special education, or undertake a subject with a shortage of teachers, such as math, science or foreign language. The Stafford plan allows teachers to receive up to $17,500 in loan forgiveness, but they’ll need to agree to stay at a low-income school for five consecutive years.

Public Servants

Programs like AmeriCorps, Vista and the Peace Corps are all examples of public service loan forgiveness programs. In exchange for working in a government-funded community service setting, the government will forgive portions of student debt. Another option within this program is available to those working in other public service roles, including nonprofits, schools, hospitals, government agencies, or military branches. This option forgives any remaining student loan debt after the individual has made 10 years of qualifying payments toward their debt.

Nurses

In addition to potentially qualifying for the public servant loan forgiveness programs, nurses and certain other healthcare professionals can receive up to 100 percent loan forgiveness for Perkins loans after five years in the profession. The National Health Service Corps program allows up to $50,000 in loan forgiveness if graduates complete a two-year service commitment, while the NURSE Corps offers 60 percent forgiveness to those willing to work in a facility experiencing a critical shortage of nursing staff.

Students Qualifying for President Obama’s Loan Forgiveness Program

President Obama introduced his own complete loan forgiveness program for students who have made 240 monthly payments over the course of 20 years. Students are also able to use a pay as you earn model, allowing their monthly payments to be a maximum amount equal to 10 percent of their discretionary income.

How Loans Affect Your Finances & Future

Loans must be repaid. That’s especially true for student loans, which cannot be canceled through personal bankruptcy. So make sure you budget and borrow wisely.

It’s one thing to complete entrance and exit counseling for student loans but it’s another to face monthly payments. Recent graduates often struggle to find a balance between landing their first entry-level job, budgeting their finances, and making all ends meet. Picking a realistic time span for paying off loans is crucial, as this will determine monthly payments. Financial counselors can also help recent graduates review their monthly income and create a balanced budget. Here are some of the saving tricks for new college grads.

Student Budgeting Tips

Understand Living Expenses

Signing a lease isn’t just rent; it’s utilities, renter’s insurance, possible upkeep, and general household supplies. You may think you can afford the monthly rent, but you’ll actually spend a few hundred dollars more each month on shelter.

Plan for Emergencies

No one wants to think about losing their job or other catastrophes, but unfortunately they can be part of life. Financial counselors suggest building up a three-month emergency fund.

Build a Credit History

Whether it’s paying your loans on time each month or getting a credit card you pay off each month, establishing good credit will be critical when it comes time to make significant purchases.

Live Within Your Means

A good meal out or a spontaneous trip is undeniably satisfying, but in the early years, a few more meals at home can make it easier to establish yourself more quickly.

Start Thinking About Retirement

Don’t laugh. It may seem crazy to start thinking about life 40 years down the road, but setting up an automated savings plan of a seemingly small amount will add up quickly and you’ll be glad you did.

Take Advantage of Tax Credits & Deductions

Former students may be able to claim a tax deduction on the interest paid for qualified loans; this amount is either $2,500 or the amount of interest paid during the tax year, whichever is lesser. As loan principals decrease, this amount naturally goes down as well.

Student Loans & Credit History

As you repay your student loans, you also are building a credit history. A credit history is the record of how well you repay all types of debt and legal obligations, from the student loans to credit cards to rent. Lenders and landlords keep credit bureaus updated on your payments. If you fall behind on, say, a credit card payment, the others you owe will soon know. Your overall credit history is summed up in a single number called a credit score.

Paying student loans on time and in full each month helps establish a strong, consistent credit history. If you run into financial difficulties, immediately contact the company managing your loan (they’re the ones collecting your payment each month). Explanations in your credit history about how you handled the difficulty can help minimize the negative impact of asking for a short break from payments.

If you run into difficulties, seriously consider opting for loan deferment rather than defaulting on payments. It’s true that interest will keep accruing while the loan is “on hold” through deferment, but that will hurt your credit score much less than simply failing to pay. Defaulting on a loan can have serious effects on your credit score, especially for students whose credit histories are short.

Considerations for Graduate & Professional Students

Graduate and professional students must often be more creative when it comes to securing loans for their educations. Only undergrads can use Pell grants and unsubsidized Stafford loans. However, the graduate PLUS loan is available only to graduate students. This loan allows students to borrow enough to cover all of their academic and living expenses, but requires them to jump through some of the same hoops as a private loan, including a credit check. Some of the same loan forgiveness programs are also open to students at this level, including the option for those going into public service professions.

While private loans generally offer less favorable terms than federal financial aid, graduate and professional students may be in a position to receive a lower interest rate if they have built up solid credit histories.

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