So you or someone you love has been accepted to college. Congratulations! Now it's time to decide how to pay for it.
Higher education is valuable but pricey — for students attending public, four-year colleges in their state, the average tuition and fees cost $11,260 a year, according to the College Board. That total grows when you add in the cost of a dorm (or apartment), meal plans and textbooks.
Even with diligent planning to pay for college, many families will need to look into borrowing after exhausting all the options for scholarships and grants.
Student loans are often referred to as "good debt," or debt that has a high-value return on investment. They're also common: More than half of the bachelor’s degree recipients in 2020-2021 graduated with some student debt, and the average borrower is on the hook for $29,100.
Here's how to get a student loan that works for you — and, eventually, pay it back.
Step 1: Figure out how much you’ll need
Start by doing some homework. But don't just CTRL+F your desired college's website for a dollar figure — that'll likely give you the sticker price. What you actually need to know is the net price, which is how much you'll pay after grants and scholarships are figured in.
That number will help you map out how much you need to borrow for all four years of college.
You can use a net price calculator to get an estimate. Search for the college you’re interested in on the Education Department's website here to find specific prices. You can also look up average net prices by income using the federal government's College Scorecard website.
Though these tools can give you a general idea of how much you can expect to pay for college, everyone's situation is different. The accuracy of the estimate from the net price calculator will depend on how detailed and accurate the information you provide about your income and assets is. People who are eligible for federal aid can get a better sense of costs when they fill out the Free Application for Federal Student Aid (FAFSA).
Fill out the FAFSA
To fill out the FAFSA, you’ll need your family's financial documents, including bank statements and investment records. The FAFSA also requires a Federal Student Aid account (called an FSA ID). Go to fafsa.gov to get started.
The application process for this year has been chaotic, due to a bungled rollout of a new form. But generally, the application opens in the fall ahead of the year you’ll be using the money, and it can be submitted until the end of the academic year.
Once you've turned in your FAFSA, you'll receive a summary report that will display your Student Aid Index, which is a measure of your family’s finances. The summary will also indicate whether you qualify for need-based financial aid, like a federal Pell Grant.
After you've been accepted to a college, you'll typically get a financial aid award letter that explains the combination of grants, scholarships and government loans you've been deemed eligible for. It'll also give you instructions on how to accept, or confirm, your financial aid.
Step 2: Take out federal student loans first
There are two major types of student loans: federal and private. Federal student loans are made by the government and overseen by the U.S. Department of Education, whereas private student loans are made by banks or other financial institutions.
How to get a federal student loan
Experts generally recommend consumers stick with the federal loan program rather than going the private route because the government provides more opportunities for relief if borrowers end up struggling with repayment. Federal student loans may also have lower interest rates than private student loans, and they're more accessible, too.
Types of federal student loans
Direct subsidized loans are for undergraduate students who demonstrate financial need. One notable quirk is that the federal government pays the interest on these loans while you're enrolled in college and during a six-month grace period after you graduate.
Other types of federal student loans include direct unsubsidized loans and direct PLUS loans.
Unsubsidized loans are an option for undergraduates as well as graduate students and professional students. These loans don't require financial need, but you're on the hook for the interest as soon as you take out a loan. Direct PLUS loans include loans for graduate students, as well as parent PLUS loans, which can be used to pay costs for a child enrolled in an undergraduate program.
Federal loans carry fixed interest rates, which means the rate will remain the same throughout the repayment term. For undergraduate borrowers in the 2023-2024 school year, the interest rates for direct subsidized and unsubsidized loans is 5.50%. For graduate borrowers, it’s 7.05%.
For direct subsidized and unsubsidized loans — also sometimes called Stafford loans — there are borrowing limits based on your year in school and your status as an independent or dependent student under FAFSA. You can see a detailed breakdown here, but speaking broadly, limits for undergraduates range from $5,500 to $12,500 in federal loans a year.
It's worth noting that there is a one-time loan fee of 1.057% for direct subsidized and unsubsidized loans.
Direct PLUS loans involve a basic credit check, but denials are uncommon. PLUS loans carry higher interest rates — currently 8.05% — and a higher origination fee of 4.2%. The biggest PLUS loan you can get is the total cost of attendance minus your other financial aid.
Repayment options for federal student loans
It’s smart to explore your repayment options and likely monthly payment amounts before you borrow to make sure you’ll be able to handle the loans once you leave school. There are several repayment options for federal loans; the government even has a loan simulator tool that helps you find your best repayment strategy based on your employment situation, location, salary, projected income growth, tax filing status and more. You can choose whether you'd prefer to pay your loan off fast, prioritize a smaller monthly payment and so on.
Step 3: Consider private student loans and other options
For some students, federal loans will not be enough to cover the costs of their education. After you've exhausted your federal loan options, you may still have gaps to fill.
How to get a private student loan
Issued by banks and credit unions, private loans have fewer protections than federal loans. They're contingent on your credit score, and they don't necessarily have borrowing limits — which can be dangerous for a student who borrows more than they can ultimately afford.
As such, tread carefully. Many experts recommend students avoid private student loans altogether, but if you are going to take them out, make sure to shop around and scrutinize each lender's terms, fees and perks before committing. Note that while students can take out federal student loans regardless of their parent’s income or credit history, with private student loans, the vast majority of undergraduate students are going to need a creditworthy cosigner to get approved for a private loan.
Other options for funding higher education
Student loans aren't mandatory. Families sometimes tap a home equity loan or home equity line of credit (HELOC) to pay for college. Interest rates may be more favorable, but because your house is your collateral, this strategy can be risky. You're basically transferring the burden from one loan to another.
Another way to manage college costs is to check with the financial aid office to see whether your school offers a tuition payment plan. These can allow families to make payments over a period of time as opposed to all at once up front. Be sure to ask about any fees that may be associated with those plans (and compare them to borrowing costs) before you go that route.
Step 4: Do the paperwork
After you fill out the FAFSA, you don't need to submit a separate loan application to access federal loans. But there is other paperwork to complete with the Education Department. With federal student loans, you'll have to do some entrance counseling that runs you through the basics of borrowing money. It'll take about a half hour.
You'll also need to sign a master promissory note in which you formally commit to paying back your loan plus any interest.
If you're pursuing a private student loan, you'll probably need to pass a credit check. According to the National Foundation for Credit Counseling, your lender is likely looking for you to have a score "in the high 600s" or above. The better your credit score, the better your loan terms and interest rates will be. If you have bad credit or no credit history (like most younger undergraduate students), you will need a cosigner. Like with other loans, a student loan cosigner agrees to share responsibility for the debt if the borrower doesn't pay it back.
To prepare for a credit check or loan application and get an idea of where you stand, you may want to pull your credit report and review your credit history for any major errors.
When it actually comes time to apply for a private student loan, you should have your (and your cosigner’s) financial information on hand, including employment and income history, bank statements and tax documents.
Step 5: Make a repayment plan
Don’t procrastinate coming up with a plan to pay back your loan.
It’s critical to understand how much your first payment will be and when you’ll owe it. Experts say for every $10,000 you borrow, you can expect to owe $125 a month for 10 years.
With federal loans, one popular repayment route is income-driven repayment, which ties your monthly student loan bills to your earnings. While the details of the individual plans vary, your payment will usually be set at 10% of discretionary income. If your earnings are low enough, your payment can even be zero.
After 10 to 25 years — depending on the plan, how much you owe and the type of loans — any outstanding student loan debt will be forgiven. But keep in mind that while these plans can reduce how much you pay monthly, they may actually increase how much you pay over the long term because your monthly amount due may not be enough to pay down your principal.
If you're having trouble affording your student loan payments, the government allows borrowers to defer (or postpone) their payments or put loans into forbearance. In forbearance, interest always accrues; in deferment, interest will accrue on most loans, though there are some that are exempt.
For this reason, the Education Department urges borrowers to learn their other repayment options before resorting to deferment and forbearance. In most cases, enrolling in an income-driven repayment plan to lower your monthly payment to a more affordable amount is preferable to either forbearance or deferment. (If you're already in one of these plans but are still struggling to afford your debt, you may be able to update your financial information to reduce your payment.)
Private lenders often have forbearance options, too, but they are less generous than federal ones. Should you choose to refinance your loans, companies like Splash Financial or Credible can help you compare interest rates and (hopefully) save money. There’s little downside to refinancing private student loans to get better repayment terms, but you should think very carefully before refinancing federal loans; refinancing means you give up access to all federal benefits and repayment options.
Ultimately, you want to do everything you can to avoid missing payments. Not only does it start you down a path to delinquency, which can affect your credit score, but it can also push your loan into default. There's a long list of consequences for defaulting on your student loans — it can impact your eligibility for more aid and block your access to certain repayment options. The government can withhold money from your tax refunds. You might even end up in court.
Before it gets to that point, you should reach out to your servicer, a financial advisor or a student loan counselor.