The Ultimate Guide to Paying for College
CEE Standard: Earning
The information in this article is something every high school student who aims to attend college should know: From applying to colleges, to the different kinds of student loans available, and how to apply for them. Break this up into multiple lessons and your students will be more than prepared with the knowledge of how to pay for college.
Whether you just graduated from high school, took some time away from academics, are returning for a master’s degree, or career change, it’s never too late (or too early) to obtain the education you want. But figuring out how to pay for college and navigating the world of college financial aid can be difficult.
There’s no shortage of private loans, federal loans, and scholarships available to subsidize your education, and it can be overwhelming for a new (or recently returned) student to take stock of all the options.
As such, we’ve compiled a ton of resources to help learners of all ages and backgrounds understand and manage their student debt and pay for college, all while never leaving money on the table.
Applying to College
What Is the Common Application, and When Do I Need to Complete It?
The Common Application allows students to apply to any of the higher education institutions that participate in the program (roughly 900). Some schools may require completion of their own application materials in addition to the Common App, which can include SAT Subject Tests or supplemental essays.
The application itself consists of several pages that must be completed online. Students first pick out the colleges to which they would like to apply, enter their academic achievements, extracurricular involvements, and any awards they’ve received using an online prompt.
Students are also required to answer one of seven essay topics to demonstrate to their college(s) of choice which elements of their character make them a good candidate for their selected school.
The final stage allows students to submit their profile after paying their school’s respective application fee, which varies by college but ranges from $25 to $90, according to a survey by U.S. News. Students who qualify can apply for a fee waiver through the National Association for College Admission Counseling with the help of their high school’s college counselor. There is no fee for using the Common App itself.
On top of the application itself, students are often required to submit additional documents, such as the SAT or ACT scores, sealed official transcripts, teacher recommendations, and other school-related information, to better state their case for admission.
What Types of Financial Assistance Are Available?
In general, there are four types of financial assistance available for higher education costs. They are:
What Are Scholarships?
Scholarships are varying sums of money awarded to students based on specific qualifications, such as financial need, academic merit, athletic ability, or a unique talent. You do not need to pay back the money you receive, though some scholarships may require you to maintain a certain grade point average or remain in a particular field of study in order to continue receiving funds.
Some scholarships are provided by the college itself, while others come from private organizations. Additionally, there are a number of private scholarships available based on specific demographic constraints.
These include awards to students of color, students of certain ethnicities (often awards by cultural organizations), LGBTQIA+ students, and more. See your high school guidance counselor for more information.
What Are Grants?
Grants are funds awarded on the basis of need and generally do not have to be repaid. There are four types of federal student grants.
Federal Pell Grants and Federal Supplemental Educational Opportunity Grants
- Federal Pell Grants and Federal Supplemental Educational Opportunity Grants are need-based grants awarded to undergraduate students. Pell Grants award up to $6,345 for the 2020–2021 school year (the amount changes each year), and Supplemental Grants award up to $4,000 per year.
- Both grants are awarded on the basis of financial need by the educational institution, determined by examining the school’s Cost of Attendance (COA) in conjunction with the student’s Estimated Family Contribution (EFC). Not all schools award Supplemental Educational Opportunity Grants. To qualify for either, students must complete the Free Application for Federal Student Aid (FAFSA).
- If a student’s EFC is less than $5,711 for the 2020–2021 school year, they are eligible for a Federal Pell Grant.
- Students are often required to maintain a minimum grade point average as designated by their school, and any who withdraw from their degree are required to pay back their grant.
Teacher Education Assistance for College and Higher Education Grants
- Teacher Education Assistance for College and Higher Education (TEACH) Grants are awarded to students who intend to teach in an elementary or secondary school that serves students from low-income families. The maximum award amount is $4,000 annually.
- Students receiving this grant are also required to fill out the FAFSA, be enrolled in a TEACH Grant-eligible program, and maintain a school designated minimum GPA. If the service requirement is not fulfilled, the grant will be converted into a loan and the money will need to be repaid.
Iraq and Afghanistan Service Grants
- Iraq and Afghanistan Service Grants are awarded to students whose parents or guardians were members of the Armed Forces and died as a result of performing military service in Iraq or Afghanistan after September 11, 2001. This grant’s maximum award amount is equal to the Pell Grant, which is currently up to $6,345.
- To qualify, a student must have been under 24 years of age or enrolled in college at the time of the parent or guardian’s death.
- Former U.S. Service Members can receive partial or full tuition reimbursement through the Yellow Ribbon Program, a part of the Post-9/11 G.I. Bill.
- Former U.S. Service Members are also entitled to the full amount of Federal Pell Grants.
What Are Work-Study Jobs?
Work-study is a program through your school that allows you to earn money during the school year while also gaining work experience, typically part-time jobs, which can be either on or off campus.
If you receive a work-study award, the number of hours you work in that position cannot exceed the award amount per semester. As such, your employer for work-study will limit your weekly schedule accordingly (and in accordance with your academic schedule).
What Are Student Loans?
Loans consist of money you borrow from either the government (federal student loans) or a private lender. You are required to pay back the money you borrow, in addition to interest as dictated by the type of loan you take out.
Student loans come in two forms: those offered by private financial institutions (such as banks) and those offered by the government in the form of federal student loans. Many students apply for federal student loans first as they often — but not always — have lower interest rates, in addition to a number of other benefits related to repayment and forgiveness.
What Types of Student Loans Are Available?
Federal Direct Subsidized Loans
- Federal Direct Subsidized Loans are government-provided loans available to undergraduate students with a financial need. Interest doesn’t accrue while you’re enrolled in school at least half time, during the six-month grace period after you leave school, and during periods of deferment.
- The current interest rate for Direct Subsidized Loans is 2.75 percent.
Federal Direct Unsubsidized Loans
- Federal Direct Unsubsidized Loans are available to both undergraduate students that don’t have a financial need and to graduate and professional students. Direct Unsubsidized Loans borrowed by undergraduate students accrue interest at the same rate as Direct Subsidized Loans (2.75 percent) however; Direct Unsubsidized Loans borrowed by professional and graduate students accrue at a current annual interest rate of 4.30 percent.
- Direct Unsubsidized Loans begin to accrue interest after they have been accepted, and while you attend school. Despite accruing more interest, Direct Unsubsidized Loans allow you to borrow in larger amounts than subsidized loans, requiring less up-front payment to your school.
- Your school determines how much you can borrow in both subsidized and unsubsidized loans. (Remember: You are required to fill out the FAFSA every year to demonstrate your financial need.)
- The amount an undergraduate student can borrow in Federal Direct Loans varies by year, but has a maximum of $31,000 for dependent students and $57,500 for independent students.
- In the midst of the COVID-19 pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), suspending student loan payments and setting interest rates to 0 percent until December 31st, 2020.
Federal Direct PLUS Loans
- Federal Direct PLUS Loans are issued to an undergraduate student’s parent(s), graduate students, and professional students after subsidized and unsubsidized loans have been awarded.
- They are designed to pay for tuition not covered already by scholarships or federal loan awards. As such, they can be awarded in an amount up to the cost of attendance for your school minus any other financial aid received.
- They also have a higher interest rate of 5.3 percent for 2020-21, and immediately begin accruing interest.
- Some veterans, depending upon their branch of the military and the length of their service, can apply for student loan forgiveness through the Department of Defense.
- Federal and private student loans have a capped interest rate of 6 percent throughout active military service for all U.S. service members.
- Private loans have maximum amounts and interest rates are determined by the loan issuer rather than the federal government. In rare cases, they can be lower than the federal government’s 3.58 percent, but in many cases, they can supersede 14.50 percent.
Note: Federal Perkins Loans are not included in this guide given that the program was shut down in 2017, though their terms of repayment are discussed later in this guide.
How Much Can I Get in Federal Student Loans Each Year?
After you’ve filled out and submitted your FAFSA, your school will determine how much you receive in federal student loans. Your maximum eligibility for federal student loans depends on your year in college, and your parent(s)’ or guardian(s)’ income (if you are listed as a dependent on their federal income tax return).
For first-year undergraduate students who are classified as dependents, the maximum amount you can take out in direct loans is $5,500. No more than $3,500 of that amount may be in subsidized direct loans.
Second-year undergraduates qualify for up to $6,500 in direct loans, of which no more than $4,500 may be in subsidized loans. Students in their third year and beyond qualify for up to $7,500 in direct loans, of which no more than $5,500 may be subsidized. For dependent undergraduates, the aggregate direct loan limit is $31,000, no more than $23,000 of which may be subsidized loans.
If the amount of federal loans awarded by your school is not enough to cover the full cost of attendance, your parents can apply for a Parent Direct PLUS Loan to cover the remaining balance not covered by all financial aid — provided they have good credit.
For example, if the COE of your freshman year is $20,000 and you receive $6,500 in loans and $10,000 in scholarships, your parents could apply for a loan of up to $3,500. Alternatively, if you received no federal loans and $10,000 in scholarships, your parents could apply for a Direct PLUS loan of up to $10,000 — the max amount is determined by how much (or how little) you receive in loan awards. Of course, the amount your parents can take out on your behalf depends on their credit and their ability to repay the loan in a timely manner.
For first-year undergraduate students who are classified as independents the maximum amount of direct loans you can take out is $9,500, and no more than $3,500 of that amount may be in subsidized direct loans.
Second-year undergraduates qualify for up to $10,500 in direct loans, of which no more than $4,500 may be in subsidized loans. Students in their third year and beyond qualify for up to $12,500 in direct loans, of which no more than $5,500 may be subsidized.
For independent undergraduates, the aggregate direct loan limit is $57,500 for the duration of your studies, no more than $23,000 of which may be subsidized loans. While independent undergraduate students may not apply for nor receive Parent Direct PLUS Loans, they can apply for private loans to cover the outstanding balance not covered by federal loans or scholarships.
“I have found that many undergrad students take out private loans to make up the cost of attendance not covered by federal loans,” says Jennifer N. Weil, student loan law and consumer bankruptcy attorney. “Other options available could include using savings, borrowing from family members, attending a tuition-free or a low-tuition institution, or working while in school,” she adds. Other people choose to attend a community college first to get prerequisites out of the way at a lower cost, then apply to the four-year institution of their choice. Graduate and professional students can borrow up to $20,500 in direct loans per year, all of which is unsubsidized.
The aggregate direct loan limit for both undergraduate and graduate or professional studies is $138,500, of which no more than $65,500 may be in subsidized loans. Graduate and professional students can also apply for a Grad Direct PLUS Loan, which, much like a Parent PLUS Loan, can cover the COA not already paid for by federal student loans and scholarships.
To minimize the amount of student loan debt you will incur, borrow only what you need to cover the cost of tuition, fees, and other costs of attendance.
Do I Need to Have a Job in Order to Get a Student Loan?
Most federal student loans are not based on your income or credit score. You do not need to have a job or any employment history to take out a federal student loan on your own behalf.
The only exception is for Direct PLUS Loans. These are loans that are taken out by graduate or professional degree students and parents of dependent undergraduate students.
One of the eligibility requirements for a Direct PLUS Loan is having a good credit score. If you have adverse credit, you may still receive a graduate PLUS loan if you obtain an endorser (someone who agrees to pay back the loan if you don’t repay it). You can get PLUS credit counseling if you have poor credit.
That said, this doesn’t necessarily mean that the borrower must have a job in order to qualify. Though, of course, it’s more likely that you’ll be able to pay your existing bills on time if you have a job.
How and When Do I Apply for Federal Student Loans?
In order to apply for federal student loans, you must complete the Free Application for Federal Student Aid (FAFSA) form.
There is no charge to fill out a FAFSA, and not only is it used to apply for federal student loans, but it’s also used by many states and colleges to determine your eligibility for state and school aid. Some private student loan companies may also use the information in your FAFSA as part of their application process.
The FAFSA form is available each year on October 1, and deadlines for submission vary based on the program. For federal student aid, you can apply between October 1 and June 30 of the next school year; for the 2020–2021 year, for example, you can apply between October 1, 2019, and June 30, 2021.
For state-based student aid, you can find relevant deadlines on the FAFSA website. Similarly, school aid deadlines can be determined by contacting the financial aid office of the school or by checking the school’s website.
Some other programs may also require that you file the FAFSA. Pell Grant eligibility and various private scholarships are determined only by your FAFSA. Your FAFSA will determine how much financial aid you are entitled to based on the cost of attendance for your institution, and what you and your family are expected to contribute.
What Is the Expected Family Contribution?
Once the form is filled out, the FAFSA gives you and your college an estimate of how much money you can afford to pay. This is called the Expected Family Contribution (EFC). The EFC estimates how much money you can pay for college out of pocket – and that’s why it’s a big deal.
For example, let’s say that a family of four with an 18-year-old and a 15-year-old have an adjusted gross income of $100,000, plus $50,000 in cash savings. Their 18-year-old, who’s applying for college next year, earns $5,000 per year and has $5,000 saved up. Using the FAFSA4caster, this family would have an estimated family contribution of $27,000 toward that child’s college bill per year.
You’re probably thinking that’s a lot of money. But the FAFSA will send this report out to any college you apply to. Given that the average annual tuition + housing at a private school is more than $49,000, there’s a difference of $22,000 that federal, state, or school funding will try to make up — or exceed.
Not only does the FAFSA provide a picture of your family’s financial situation, but it also shows what “free” and “borrowed” money you may qualify for. Some of the funds up for grabs include federal grants, college-specific scholarships, and the (dreaded, but often necessary) federal student loan.
“Many parents think that they make too much money to qualify for [aid from the] FAFSA, so they don’t fill it out,” says Mary Frank, a financial aid officer. “Every year I have to tell them that it’s not true.”
“The FAFSA isn’t just for the poorest of the poor. It’s for middle-class families and those with savings,” Frank continues.
“While you may not qualify for Pell Grants or need-based aid, you may be surprised what you can receive.”
When Should I Fill Out the FAFSA?
Before you fill out the FAFSA, you must meet a few requirements. First, you must be a legal U.S. resident or citizen with a Social Security number. If you’re male, you’ll need to be enrolled in Selective Service. Finally, you must either currently attend high school or have completed high school or a GED high school equivalency program.
The FAFSA is open from October 1 through June 30 for the next school year. That said, it’s important to always double- and triple-check these deadlines, as they are subject to change.
Frank also gives this invaluable piece of advice: “Apply early. Money for programs like work-study [in which a student works and earns money toward tuition during the school year and often on campus] dry up quickly. The earlier you apply, the better your chances.”
And don’t think you’ll stop applying after your freshman year. Any student — including those in graduate or doctoral programs — requesting financial aid must reapply for every enrollment year.
What You Need to Know Before You Apply
Now that you’re aware that you need to fill out the FAFSA, there are a few essential items you’ll need to know before you begin.
First, and maybe most important, you’ll need to determine if you’re an independent or dependent student. This is one of the most common mistakes filers make, especially for nontraditional students.
The bottom line is that if you’re under 24 years old, with at least one living parent (estranged or not), unmarried, working toward your bachelor’s degree, and not currently serving (and haven’t previously served) active duty in the armed forces, you’re considered a dependent student.
However, because these situations are tricky and regulations change yearly, we recommend talking to a financial aid expert about your unique situation or checking out the FAFSA’s explanation. Additionally, utilize resources from the FAFSA’s website, such as their worksheet, to have an idea of what questions you will have to answer when filling out the application.
How Do I Fill Out the FAFSA?
Once you’ve determined if you’re an independent or dependent student, you’re ready to begin. You will first need to request an FSA (Federal Student Aid) ID. Parents Will need one in addition to the student. Don’t mix up your IDS, as that will delay your application.
First-time applicants may need to wait up to three days to receive their ID by email and seven to 10 days by mail.
Then you’ll head to the FAFSA site and begin filling out your application. You’ll start by selecting what year(s) you’ll need aid for, followed by personal demographics, the schools you’re applying to (up to 10), and whether you’re an independent or dependent student.
Finally, you’ll use last year’s taxes to submit the parent and student’s financial information. If you’re paperwork averse, you can use the myStudentAid app for iOS and Android to securely transfer federal tax data into your application.
You can also use the retrieval tool to pull up your previous year’s information, saving time and stress.
The final step is for all parties to sign and submit the FAFSA. This is where the FSA ID comes back into play. And remember to never, ever mix up your parent and student FSA IDs. If you don’t want to sign electronically, you can print and mail it. (And parents of multiple children, keep that FSA ID safe. You’ll use it again for future FAFSA applications.)
Where Can I Find Help?
Many community colleges and nonprofit organizations offer free FAFSA workshops or assistance. At the community college where I work, any community member can come in during business hours and receive individual support from a financial aid officer. Most tax preparers and tax software (such as TurboTax) will also help you fill out the FAFSA as part of your income taxes.
What Happens Next?
Once you’ve submitted your FAFSA, your application for financial aid is sent to the colleges you’ve selected, as well as to federal and state agencies. The financial aid office at your school will then determine how best to offer (or not offer) financial aid to you.
In about one to three weeks, you’ll receive a Student Aid Report, which is a summary of your information. Make sure to go over every line, as you will want to catch and correct any errors.
The schools where you applied (and are admitted to) will present a financial aid package or award letter. This includes a mix of aid you qualified for using the FAFSA, as well as school-specific merit and need-based scholarships.
What Is the Cost of Attendance, and Why Does It Matter?
A school’s cost of attendance (COA) is the average cost to attend for a single year on a full-time basis. The cost of attendance includes tuition and fees, books and supplies, room and board, transportation, and personal expenses.
The cost of attendance is pivotal in deciding your choice of school. The college will subtract your Expected Family Contribution from the cost of attendance to determine your need for financial aid. The higher the COA, the more aid you can potentially get to help pay for college.
The cost of attendance is set by the school and reflects the average cost — not necessarily your cost. For example, your travel costs may be lower than what’s reflected in the COA if you bike to class or take public transportation. Your food costs may be lower or higher based on your college meal choices.
Each school is required by federal law to publish its COA, and since July 1, 2011, the Department of Education has been required to publish that information.
You can find the COA of every school at the U.S. Department of Education’s College Scorecard. Your desired school’s COA, in the context of your EFC, will tell you how much you will have to earn in scholarships, or take out in student loans, to afford to attend the school.
Should I Take Federal or Private Loans?
Which type of loan you take will largely be determined by your school’s COE, the amount of need-based aid you receive from your college’s office of financial aid (which includes grants and loans), and the amount you receive in need and merit-based scholarships.
Additionally, you can expect to receive a loan amount relative to your family’s income. The lower your EFC, the higher the amount of Federal Subsidized, Unsubsidized Loans, and grants you can expect (and vice versa).
When considering whether to accept a federal loan award or to take on a private loan, you should consider a handful of factors. For example, federal student loans tend to have lower interest rates than their private counterparts, but have limits as to the amount you can borrow.
Moreover, federal student loans offer benefits such as interest subsidies, the ability to defer or postpone payment, loan forgiveness, multiple income-driven repayment plan options, fixed interest rates, and the ability to deduct the interest paid on your student loan from your taxes.
Conversely, private loans are more widely available, and may not require the student to demonstrate financial need, but on average have much higher interest rates — which can make repaying them more difficult.
Federal loan recipients can also apply for income-driven repayment — meaning you repay based on your ability — to reduce their monthly repayment amount and apply for loan forgiveness, though neither is guaranteed and the latter is difficult.
Additionally, you can qualify for Public Service Loan Forgiveness if you work for the government (federal, state, or local), a 501(c)(3) nonprofit, or other public service organization, and have made 10 years’ worth of qualifying payments towards your student loan debt.
Read your loan agreement in detail and consider all factors, including interest rates and what your repayment timetable might look like before you sign the dotted line.
Currently in College
If your scholarship is rescinded or otherwise falls through, you may need to look for other ways to pay for the semester. Search for other scholarships to replace the lost funding, or investigate whether a private student loan is your best choice.
Your last option would be to withdraw from school for the semester, but be mindful of your school’s deadlines for withdrawing without penalty — after a certain point, usually following a month of classes, you are obligated to pay for a semester’s tuition regardless of whether you withdraw or continue your education. Additionally, you may be entitled only to a partial tuition refund if you withdraw two or three weeks into class.
If you have to withdraw due to extenuating financial circumstances, you may be able to appeal your case and receive a full refund; you’ll have to discuss the specifics of your situation with your university’s office of the bursar or registrar.
If you’ve received a federal grant, you will be obligated to pay back that money as well.
How Do I Make Sure I Don’t Run Out of Money?
Your financial aid package is designed to cover the entire cost of attendance for the school year. Beyond the fixed costs of tuition and fees, you are responsible for budgeting accordingly.
It’s a good idea to keep track of your regular monthly expenses for such things as housing and utilities, then allocate the remaining funds on a monthly basis.
Look at your other debts, recurring expenses, and nonessentials, and see if there’s a way to reduce or eliminate them. If you are in a difficult financial situation, credit counseling, debt settlement, and (in extreme cases) filing for bankruptcy, may help to get rid of your other debts, freeing up money to pay your student loans.
Be sure to speak with a professional about whether these debt relief options are right for you. All of them have various pros and cons, and bankruptcy in particular can negatively impact your credit for the next 7 to 10 years This in turn can force lenders to charge you a higher interest rate on your existing private student loans, thereby making your student loan debt even larger.
Must I Buy My Books at the College Bookstore?
You do not have to buy your books at the college bookstore. Though it’s a convenient way to purchase textbooks and supplies, other resources are available.
Amazon or other online retailers may offer better deals, and you should look out for discounts and coupons to save even more. When buying online, be sure to check out sites such as Rakuten (formerly Ebates), which gives you cash back for purchases made at select online retailers. In addition, BigWords provides comparisons for used book prices.
One great way to save money on textbooks is to sell back the ones you bought last semester. Amazon, Chegg, Barnes & Noble, Bookbyte, Cash4Books, and Alibris all purchase used textbooks. If all else fails, find a friend who’s taking the same class and see if sharing a textbook works for the two of you.
Can I Apply for a Scholarship While I’m in School?
There are plenty of scholarships available to current college students. Visit your financial aid office to learn about the resources available to you. Beyond that, there are numerous online search engines that can help you find the right scholarships for you. Among the most comprehensive are:
Can I Get More Student Loans if I Fall Short During the Semester?
If you’ve budgeted properly, you shouldn’t fall short on money during the semester. If you do, consider talking with a budgeting professional, or using a personal finance app, to help bring your finances in line for next semester.
You may be able to appeal for more aid in the middle of the semester, but doing so requires a change in your family’s financial circumstances. In the absence of such a special circumstances review by your school, however, you won’t qualify for more federal financial aid.
Private lenders, however, may be willing to give you more money during the semester.
Returning to School
Can I Get New Loans When I Go Back to School?
As long as you are not in default on an existing federal student loan and have not borrowed the lifetime maximum amount, you can get new federal loans when you go back to school.
Private student loans are subject to each bank’s underwriting standards, so your ability to get a new loan will be based on your income, credit score, and other factors.
Do I Need to Continue Paying My Loans While I’m in School?
You can apply for a deferment of your federal student loans when you are enrolled at least half-time in a college or career school, as well as during periods of study in an approved graduate fellowship program or in an approved rehabilitation program for the disabled. You can also apply to defer your federal loans for the first six months after ceasing to attend school half-time.
You do not need to make payments during the deferment period. In addition, the government may pay the interest on your Federal Perkins Loan, Direct Subsidized Loan, and Subsidized Federal Stafford Loan while your loans are deferred.
Private student loan deferments are granted or denied by the individual lending institution. You may or may not be granted a deferment, depending on the bank’s policies — check with your loan provider to understand whether you will continue to accrue interest, and for how long.
Do I Qualify for Additional Federal Loans If I’m Behind on My Existing Loans?
You can qualify for new federal student loans if you’re behind on your existing loans and have not received the lifetime maximum loan amount.
If you are delinquent on your student loans, you may consider asking your loan servicer for forbearance to cover past loans and bring your loan current. You may also want to consider enrolling in an income-driven repayment plan.
Will an In-School Deferment Harm My Federal Student Loan Forgiveness Eligibility?
Deferring your student loan payment will not affect your eligibility for student loan forgiveness — it can, however, delay how soon your loans can be forgiven.
“Deferring payments after you’re out of school can delay the type of forgiveness that you could receive after completing an income-dependent repayment plan,” says Weil. “This is because the time your student loan spends in deferment does not count toward the number of months that your loan must be in repayment before you become eligible for loan forgiveness.”
Depending on the repayment plan you select, your loan will be forgiven in full in either 20 or 25 years, but it requires consistent payment for the entire period to be eligible for forgiveness. As such, deferring payment will not exempt you from forgiveness, but it will push your forgiveness to a later date. The more money you can put toward paying off your student loans means the quicker they will be repaid and out of your life. If you are able to pay them at an accelerated pace, this will reflect favorably on your credit score.
Should I Borrow From My Retirement Funds for My Education?
Borrowing from your retirement for your education is a difficult question that requires an analysis of your financial situation, what kind of retirement account you have, how long you have left before retirement, and your anticipated increase in income once you’ve completed your education.
Before making a decision, consider that you will need to repay the retirement loan or may be subject to severe early withdrawal penalties and taxes. Should you fail to repay the amount withdrawn, you will also lose out on additional retirement income, which can prolong your years in the workforce.
While withdrawing money from your retirement may not result in a 10 percent early withdrawal penalty, you should consider the cost of that money being removed from your retirement account.
For example, $20,000 in a 401(k) with an annual return of 7 percent could net you over $150,000 over the course of 30 years, an amount you deny from your future post-retirement income by using it to pay for your education in the present. You may be denying yourself immense future wealth as a consequence of withdrawing in the present.
Finally, by foregoing a student loan in favor of a retirement plan loan, you will forfeit potential tax benefits associated with the deductibility of student loan interest.
“A limited amount of student loan interest that you’ve paid during the tax year can be deducted, so long as you meet the IRS criteria for the deduction,” says Weil.
“After the end of the year, you should receive from your lender or loan servicer a form 1098-E, the Student Loan Interest Statement, showing how much student loan interest you paid in the last year,” adds Weil. “You would use the amount listed on that form to help determine how much of a deduction you’d get.”
As such, if you’re considering using your retirement account to pay for school, consider speaking with a financial professional first to see if it’s the best move for you and your money.
When Do I Need to Start Repaying My Student Loans?
Once you are no longer enrolled at least half-time in an eligible program, you’ll receive a six-month grace period on your Direct Subsidized and Unsubsidized Loans, during which you are not required to make loan payments. There is no second grace period — once you use the full six month grace period, you’ll have to start paying your federal student loans back immediately. You can request forbearance by contacting your loan servicer if you need more time, but it may not be granted.
There is no grace period for Direct PLUS Loans — you must begin repayment the day after the final loan disbursement is made. However, if you’re a graduate or professional student PLUS borrower, you can defer repayment while you’re enrolled half-time and for an additional six months after you drop below half-time enrollment.
Private student loans may come with a grace period similar to federal loans, but not always. Check with your lender and read the promissory note carefully before you sign.
How Do I Choose a Student Loan Repayment Plan?
The Department of Education will automatically enroll you in a 10-year standard repayment plan for your federal student loans, but other plans are available. Review the government’s Repayment Estimator to see how much you would pay on various plans.
The default income-driven repayment plan option by loan services is the Revised Pay As You Earn option (REPAYE). This plan may or may not be the best option for your personal and financial circumstances, so consult with a finance professional knowledgeable about student loan repayment options for advice.
What Are the Repayment Options for Federal Student Loans?
There are seven main repayment options for federal student loans. They are:
Fixed payments for up to 10 years (30 years for consolidation loans).
Payments are low at first, but they increase every two years for a total period of 10 years of repayment (30 years for consolidation loans).
Fixed or graduated payments for up to 25 years. Must owe $30K or more in Direct Loans or Federal Family Education Loans (FFEL).
Income-Contingent Repayment (ICR)
Payments are set at 20 percent of your discretionary income — or the amount you would pay on a repayment plan with a fixed payment over 12 years — calculated annually. (Direct Loans, as well as Direct Consolidated Loans and Parent PLUS Loans are eligible under ICR. ICR also offers student loan forgiveness after 25 years however, ICR does not offer an interest subsidy during the repayment period.)
Income-Based Repayment (IBR) — Old
If your first loans were issued before July 1, 2014, payments are limited to 15 percent of your discretionary income. Direct Loans and FFEL Loans are eligible under the IBR Old plan. Parent PLUS loans are ineligible. A partial financial hardship is required, which means that your monthly payment under this plan must be less than it would be if you were enrolled in the standard 10-year repayment plan. Loan forgiveness occurs after 25 years of repayment. For the first three years of enrollment in the plan, unpaid interest on subsidized loans is waived.
Income-Based Repayment (IBR) — New
If your first loans were issued on or after July 1, 2014, your payments are capped at 10 percent of your discretionary income. Direct Loans, excluding Parent PLUS loans, are eligible. Like the IBR Old plan, a partial financial hardship is required. Loan forgiveness occurs after 20 years of repayment.
For the first three years of enrollment, unpaid interest on subsidized loans is waived.
If you received loans via the Federal Family Education Loan (FFEL) Program, you could qualify for Income-Sensitive Repayment, which caps monthly payments between 4 and 25 percent of your gross monthly income to ensure your loans are paid off within 15 years.
This payment plan is only available to FFEL loan recipients, a program which was discontinued in 2010 — however, if you accepted a FFEL loan, speak with your loan service provider to see if this option is the most salient move for tackling your student loan debt.
Pay As You Earn (PAYE)
Payments are set at 10 percent of discretionary income, calculated annually, for a maximum of 20 years. If you had no federal student loan balance on or before October 1, 2007, and new federal loans were issued after October 1, 2011, you are eligible to enroll in the PAYE. Direct Loans, excluding Parent PLUS loans, are eligible. A partial financial hardship is required, and/or the first three years of enrollment, unpaid interest on subsidized loans is waived.
Revised Pay As You Earn (REPAYE)
Payments are set at 10 percent of discretionary income, calculated annually, for a maximum of 20 years (25 years if you borrowed $1 for graduate studies). Direct Loans, excluding Parent PLUS loans, are eligible for REPAYE. All (100 percent of) unpaid interest is waived on subsidized loans for the first three years of enrollment in the plan and 50 percent of unpaid interest on all loans is waived for the life of the loan.
Not every repayment option is available for every type of federal student loan, so check with a professional and review Department of Education resources before making a decision on which repayment option is best for you.
How to Manage Your Student Loans
Can I Consolidate My Federal Loans?
Once you have finished or left your post-secondary institution, you may have the option to apply for a Federal Direct Consolidation Loan. This allows you to consolidate all of your varied federal loans into two loans: Direct Consolidated Subsidized and Direct Consolidated Unsubsidized.
A single monthly payment will be due each month for the entirety of your debt.
Federal student loan consolidation is often misunderstood by student loan borrowers. Borrowers often think that consolidating their federal loans is necessary if they want to lower the interest rate(s) on their loans, but federal student loan consolidation doesn’t accomplish this goal.
As a matter of fact, when you consolidate your student loans, the new interest rate of your consolidated loans becomes a blended rate that is then increased by .125 percent. This blended interest rate eliminates the option to target paying off loans with the highest interest rates. Federal student loan consolidation also restarts the loan forgiveness clock for Public Service Loan Forgiveness (PSLF).
If you have made qualifying payments toward PSLF and then consolidate your loans, you will lose credit for any PSLF payments you’ve made. Any outstanding interest accrued prior to consolidating your loans will be added to the principal amount.
When trying to determine whether you should consolidate, it’s recommended that you consult a financial professional who has the expertise to help you make the decisions that best suit your personal and financial needs.
Also, utilize the Department of Education’s Repayment Calculator to make sure you don’t end up paying more in the process of loan consolidation.
Can I Get a Cosigner Removed From My Loan?
Federal student loans do not typically have cosigners. The only exception is for some Direct PLUS Loans.
For private student loans with cosigners, the requirements vary from lender to lender. As a general rule, private lenders will require you to have excellent credit and significant income before releasing a cosigner.
What Happens If I Can’t Pay My Loans?
If you can’t pay the amount due on a federal student loan, consider enrolling in one of the income-driven repayment plans to reduce your payment amount.
Enrolling in an income-driven repayment plan may be a better option than applying for forbearance, because of the interest subsidies that some income-driven repayment plans offer. For example, if you have a standard repayment plan, consider an extended, graduated, or income-dependent plan; additionally, see if loan consolidation will lower your monthly interest payments while extending the life of your loan.
If you are unable to pay the monthly amount due for any of these plans, consider a short-term forbearance until your situation improves. Just know that interest will continue to accrue during the forbearance period and that, at the end of the period, the interest accrued will be added to the principal balance.
You may qualify for federal loan forbearance if your monthly loan amount is 20 percent greater than your gross net income, you are experiencing economic hardship, or are required to pay certain medical expenses. You can also state your case if you believe your specific financial situation merits forbearance.
Check the qualifications for delaying loan payments listed on the U.S. Department of Education’s website. If you believe you qualify for loan forbearance, contact your student loan provider to apply — your loan servicer will walk you through the necessary steps (and provide the necessary forms) to delay payment.
One of the caveats of forbearance is the continued accumulation of interest, which you can opt to pay monthly, or allow to accrue and be added to your principal at the end of your forbearance period.
At the same time, speak with a budgeting professional to help you bring your income and expenses into balance so you can better afford your loan payments. For private student loans, call your lender to see if there are any ways to reduce your payments.
Also look at your other debts and see if there’s a way to reduce or eliminate them. Credit counseling, debt settlement, and bankruptcy may help to get rid of your outstanding debt, freeing up money to pay off higher interest student loans. Be sure to speak with a professional about whether these debt relief options are right for you.
It may also be helpful to take advantage of student loan provisions as guaranteed by the CARES Act if you’re currently struggling to pay off your debt. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 also allows individuals to contribute up to $10,000 of their 529 plans towards the payment of student loans as well.
Finally, don’t give up hope. While it may seem impossible to pay off the whole amount, federal student loan plans like PAYE, REPAYE, income-based repayment, and income-contingent repayment are forgiven in full in 20 to 25 years. While thinking decades ahead may seem futile, if you consistently continue to make whatever payments you can, the rest of your balance will eventually be forgiven — and you’ll be debt-free for good.
Additional reporting and expert commentary for this article was provided by Jay S. Fleischman and Frank Shields.
Jay S. Fleischman is a consumer protection attorney helping people with issues surrounding student loans and other debt problems. He is admitted to practice law in New York and California, and assists federal student loan borrowers nationwide.
Frank Shields is the Founder and Director of Financial Planning at Future Map Financial, a fee-only financial planning firm that offers Student Loan Repayment Consulting, Holistic Financial Planning, and Investment Management services. Located in Houston, serving clients locally and across the country, Frank specializes in helping student loan borrowers create and implement the optimal student loan repayment strategy for their personal and financial circumstances.
Resources and Directory
- Free Application for Federal Student Aid (FAFSA)
- Federal Aid Family Estimator (FAFSA4caster)
- The Common Application