College costs. No matter what type of program you're interested in, figuring out how to pay for college is one of the biggest parts of the process. This is especially true since there are nearly as many potential financial aid options as there are schools. For students who can't afford college on their own, there are three main possibilities: college scholarships, grants and loans.
Many students use a combination of these three options. Scholarships and grants do not need to be repaid, but students can't rely on finding or earning them. Even if you land a scholarship or grant, funds are often limited, so you may need to supplement your college finances with loans. Since student loans must be paid back with interest, it's important to borrow only what you need and to choose the loan carefully. Data from Sallie Mae's 2018 report "How America Pays for College" shows that two-thirds of families who borrowed money for college say they had always planned to borrow, while 39 percent of families who borrowed admit they had not researched student loan payment options.
Since student loans must be paid back with interest, it's important to borrow only what you need and choose the loan carefully.
While taking out student loans may seem like a rite of passage for college students, you shouldn't jump into loans without doing your research. Our Ultimate Guide to Online College Loans can help students identify different ways they might fund their education. In this guide, we explain what you need to know about student loans, to help you make smart choices about how to borrow and how much to borrow.
Once you've taken out loans, it's harder to restructure or modify the loans later, so the best way to set yourself up for success is to understand the different types of student loans before you start. Here's what you should know beforehand.
Federal student loans and private student loans have a few key differences that you should know. Private loans typically have different terms and repayment options than federal loans. You may not be able to defer a private loan or have the balance forgiven in certain circumstances as you could with some federal loans.
Your first student loan payment isn't due until six months after leaving school. While subsidized loans do not accrue any interest while you're in school, unsubsidized loan interest starts accruing from the day the loan is disbursed. Some federal loans subsidize interest and others do not; generally, private loans are not subsidized. The interest rate for federal Direct Loans -- both subsidized and unsubsidized -- for undergraduate students is 5.05 percent, as of December 2018. Direct Unsubsidized Loans, Direct PLUS Loans and other loan programs have higher interest rates, so be sure to check the Federal Student Aid site if those apply to you. Federal loans are tied to the financial markets, but private student loans can vary at different interest rates.
Try to limit your total student loan borrowing to the amount you anticipate earning in your first salary after graduation. For example, if you reasonably think you'll earn $40,000 per year, you wouldn't want to borrow more than $40,000 or else your loan payments could be overwhelming. Our Program pages might be able to help you estimate the salary of the career you're working towards; other sites, such as the Bureau of Labor Statistics or Glassdoor, are also good resources. If your intended program requires you to borrow substantially more than your anticipated salary, try to bridge that gap with scholarships or consider attending a less expensive program.
Some recent grads are shocked when they discover the monthly repayments on their student loans. To avoid this unpleasant surprise, go to the government website Studentaid.ed.gov and use their repayment estimator tool. Once you see the number, make sure you think about it in context. For instance, having to pay $600 a month toward student loans may sound doable at first, but it might also mean having to fit more work hours into your schedule. Will you be able to do that while studying for class?
The U.S. government offers two types of undergraduate loans:
These are sometimes also called Stafford Loans. The amount you can borrow under these programs varies depending on what year you are and whether you're considered a dependent of your parents or are independent. With both options, the Department of Education is the lender. These two loans are pretty similar — the main difference between the subsidized and unsubsidized loans is how they accrue interest.
These loans are offered to students who demonstrate financial need, and the school they're attending determines how much they can borrow. The government pays the interest while you're in school and for six months after you leave, meaning you don't have to worry about these loans until after you're done studying.
These loans are offered to students who demonstrate financial need, and the school they're attending determines how much they can borrow. The government pays the interest while you're in school and for six months after you leave, meaning you don't have to worry about these loans until after you're done studying.
Direct PLUS Loans are available to parents of undergraduates or graduate/professional students. The interest rate is higher than Direct Loans taken out by an undergraduate student themselves, and if the loan is taken out by the parent, responsibility for repayment cannot be transferred to the child.
Another loan option, the Federal Perkins Loan Program, has been available in the past. This program expired 9/30/17, although Congressional bills have been introduced that support its extension.
Regardless of which kind of loan you might qualify for, all students who want federal financial aid apply for it in the same way: with the FAFSA. FAFSA, or the Free Application for Federal Student Aid, helps determine what portion of the financial responsibility for college the government thinks you or your family can bear. It's a relatively quick application, and it's not only used for federal aid. Even if you don't want one of these three types of loans or don't qualify for federal grants, it's important to fill out the form because it can determine whether you're eligible for aid from specific colleges or states, and even from some private lenders. Learn more about the FAFSA with our Ultimate Guide to the FAFSA.
Federal loans are a relatively common source of financial aid for students at brick-and-mortar colleges, but they can be used for some online colleges and distance-learning programs as well. However, "some" is the operative word. The Department of Education warns that not every online or distance-learning option is eligible for federal aid. Contact your school's financial aid department to find out if you can use federal loans to fund your education, and if so, which ones.
Federal loans are actually paid back to a loan servicer, not the government. The loan servicer involved depends on the type of loan disbursed and the school you attended, but you can check who your servicer is via the National Student Loan Data System on the Department of Education website.
Here are a few important details on repayment that people should know before they apply for federal student loans:
Federal Loan Interest Rates for the 2018-2019 School Year
Direct Subsidized Loans | 5.05% |
Direct Unsubsidized Loans | 5.05% |
Direct Unsubsidized Loans | 6.6% |
Direct PLUS Loans | 7.6% |
"Since the Federal Student Loan program is regulated by the federal government, the program offers flexible repayment options based on current income, postponement of payment through deferment or forbearance options, tax deductible possibilities and possible loan forgiveness opportunities. The consumer does not have the advantage of these benefits with personal or other types of loans." -Ryan C. Williams, Associate Vice President of Enrollment Management, Syracuse University
Be aware of what different grace periods and repayment plans are available, but if you're still confused, remember that there are a lot of resources out there to help you figure out the best repayment options for your own loan and income. FinAid.org and other websites offer calculators to figure out whether standard or extended repayment plans are the better fit, as well as how much interest you'll end up paying over the repayment period.
In addition to federal loans, financial aid from individual states can also be helpful to online college students. Every state has its own higher education agency. While nearly all of them have grants or scholarships available to students, some also offer loan options.
An important thing to note about loans from individual states is that, while you still have to fill out the FAFSA, states have their own deadline for receiving the application, which might be different from the federal deadline of June 30.
The National Association of Student Financial Aid Administrators (NASFAA) can help you check out loan resources in your state, but remember to verify that these loans can be applied to online colleges.
Here are examples of some of the state loan options:
The Alabama Board of Nursing offers loans to registered nurses who have been admitted to graduate nursing programs and who agree to teach full-time or work as a nurse in Alabama for two years after graduation.
To learn more about state loans, as well as other forms of financial aid in the state, read about financial aid in Alabama.
The Alaska Supplemental Education Loan (ASEL) offers graduate, undergraduate and vocational loans to Alaska residents or students enrolled at eligible schools in the state.
To learn more about state loans, as well as other forms of financial aid in the state, read about financial aid in Alaska.
The Math, Science and Special Education (MSSE) Loan is a need-based, forgivable loan that can be used for up to three years. Students who take out this loan commit to teaching in an Arizona public school for a set amount of time. If they do not meet that commitment, they are required to pay the loan back with interest.
To learn more about state loans, as well as other forms of financial aid in the state, read about financial aid in Arizona.
Loans from the Connecticut Higher Educational Supplemental Loan Authority are available for undergraduate, graduate and professional study. The student must be enrolled in a degree-granting or certificate program on at least a half-time basis in an accredited, nonprofit college or university in Connecticut, or be a Connecticut resident attending an accredited, nonprofit college or university in the U.S.
To learn more about state loans, as well as other forms of financial aid in the state, read about financial aid in Connecticut.
Georgia Student Access Loan (SAL) is administered by the Georgia Student Financial Commission. This loan program is need-based and has low interest rates. Engineering students who meet certain conditions may also qualify for the state's Engineering Education Service Cancellable Loan Program.
To learn more about state loans, as well as other forms of financial aid in the state, read about financial aid in Georgia.
Students in Maine can potentially get loans from the state to pursue certain courses of study, and they are typically for borrowers who want to work as healthcare providers in underserved areas of the state. These loans include the following:
To learn more about state loans, as well as other forms of financial aid in the state, read about financial aid in Maine.
The Massachusetts No Interest Loan is a need-based program that helps eligible students pursuing postsecondary education. The loans have a 10-year repayment period.
To learn more about state loans, as well as other forms of financial aid in the state, read about financial aid in Massachusetts.
The Minnesota SELF Loan is a low-interest, long-term loan for students who attend eligible schools that have a contract with the state's Office of Higher Education. If you're enrolled in an online college in Minnesota, check with your school's financial aid office to find out whether you qualify.
To learn more about state loans, as well as other forms of financial aid in the state, read about financial aid in Minnesota.
The New Jersey College Loans to Assist State Students (NJCLASS) offers low-cost loans to both undergraduate and graduate students. These loans have flexible repayment options. A co-signer is not required if you're applying for the graduate loans, regardless of your income.
To learn more about state loans, as well as other forms of financial aid in the state, read about financial aid in New Jersey.
The state-offered loans in New Mexico are primarily loans for service, in which up to 100 percent of a loan is forgiven if you commit to working in a certain industry or a certain underserved area in the state. These loans include the following:
To learn more about state loans, as well as other forms of financial aid in the state, read about financial aid in New Mexico.
Ohio offers the Nurse Education Assistance Loan Program for nursing students in the state. Loan recipients who work in Ohio after graduation qualify to have 100 percent of their loan forgiven.
To learn more about state loans, as well as other forms of financial aid in the state, read about financial aid in Ohio.
The Palmetto Assistance Loan (PAL) program provides loans to South Carolina residents attending school in state or out of state, as well as out-of-state students attending school in South Carolina. Those studying to become a teacher may benefit from the South Carolina Teachers Loan program.
To learn more about state loans, as well as other forms of financial aid in the state, read about financial aid in South Carolina.
Several loan forgiveness plans exist in Tennessee. These include the following:
To learn more about state loans, as well as other forms of financial aid in the state, read about financial aid in Tennessee.
The Lone Star State has three options for student loans. The College Access Loans and Texas B-On-Time Loan are not need-based, though it's still recommended you fill out the FAFSA. The state also offers the Every Chance Every Texan Loan Program.
To learn more about state loans, as well as other forms of financial aid in the state, read about financial aid in Texas.
Virginia offers two loan forgiveness programs: the Teacher Loan Forgiveness Program and the Public Service Loan Forgiveness Program.
To learn more about state loans, as well as other forms of financial aid in the state, read about financial aid in Virginia.
Med students with financial need might qualify for West Virginia’s Medical Student Loan Program, which offers up to $10,000 annually to students pursuing an advanced degree at one of three public institutions in the state.
To learn more about state loans, as well as other forms of financial aid in the state, read about financial aid in West Virginia.
There are three options for loans offered through Wisconsin’s Higher Educational Aids Board that might be offered to online college students:
To learn more about state loans, as well as other forms of financial aid in the state, read about financial aid in Wisconsin.
While government loans generally give students better interest rates and borrower protections, some students who don’t qualify for federal or state loans or simply need more financial assistance than the FAFSA can provide may need to borrow from a private lender.
Federal and private student loans have a few notable differences. First, federal loans have some guaranteed consumer protections, such as the option to temporarily defer or forgo payments and discharge of the outstanding balance upon a borrower's death. Private lenders are not required to offer this type of flexibility on student loans, but some do. Also, in some cases, the government will subsidize interest on federal loans while you're in school or forgive the balance after you've worked in public service for 10 years. Another key difference is that certain federal loans do not require cosigners, while some private lenders do.
“Students should always complete the FAFSA and take the federal loans first. They have better interest rates (almost always), several options on how to repay, delayed repayment for financial hardships, and discharge in the event of your death. If you have to obtain a cosigner for a private loan, they will have to pay back your loan if you can't.” -Billie Jo Hamilton, Director of University Scholarships & Financial Aid Services, University of South Florida
Before you take out private loans, see how much money you can get from other sources, such as grants, scholarships and federal student loans. Most private student loans used to carry a variable interest rate, but over time, many private lenders have come to offer both variable and fixed rates. A fixed rate remains the same over the life of the loan, while a variable rate can fluctuate based on market conditions. If you're planning to fund your college degree with private loans, it pays to shop around and compare options, as private loan interest rates can vary greatly.
Here's a collection of fixed and variable rate private student loan packages to consider.
SunTrust's Custom Choice Loan is available with fixed or variable interest rates. As of December 2018, the variable rate undergraduate loans with a $25 in-school repayment start at 4.122 percent APR to 13.125 percent APR, while fixed rates range from 5.347 percent APR to 14.050 percent APR. The loan principle can range from $1,001 to $65,000 annually.
The PNC Solution Loan for Undergraduates offers loans with fixed or variable interest rates and terms of up to 15 years. According to PNC's website, as of December 2018, variable rate loan interest rates range from 5.19 to 11.39 percent, while fixed rates range from 6.03-12.99 percent. A cosigner is required.
Wells Fargo offers private student loans for traditional four-year colleges (a collegiate loan) and career and community colleges. Discounts are available for having a previous Wells Fargo student loan or other qualifying account or enrolling in automatic payments. According to the Well Fargo website, as of December 2018 collegiate loans range from 4.81 percent (with discount) to 10.72 percent (without discount) APR for a variable rate or 5.94 percent (with discount) to 11.26 percent (without discount) APR for a fixed rate.
Citizens Bank Student Loan® offers discounts for enrolling in automatic payment and/or if you or your cosigner has another qualifying account with Citizens Bank. Choose between 5, 10 and 15 year payment terms. According to the Citizens Bank website, the interest rate on a deferred payment undergraduate loan with a fixed interest would range between 6.43 and 11.02 percent APR, while a variable rate loan would carry an APR between 6.40 and 10.99 percent, as of December 2018.
According to the website in December 2018, Sallie Mae's Smart Option Student Loan for undergraduates carries variable rates of 4.37 to 11.23 percent APR or a fixed rate of 5.74 to 11.85 percent APR. Borrowers can also reduce their rate by .25 percent by enrolling in automatic debit payments.
The actual student loan interest rates you receive may vary depending on factors like your chosen loan term (typically 5, 10 or 15 years), your credit history or that of your cosigner, any discounts available and the repayment schedule you choose. It's also crucial to make sure that the loans you're considering can be used at your school of choice. Some private lenders only lend to students attending certain schools. This means it is important to do your research and find the loan(s) that makes the most financial sense for your situation.
When you're ready to compare student loan options, the ELM Select Tool might come in handy. ELM Resources is a nonprofit corporation that serves the student loan industry. Its comparison tool is a non-proprietary, open data exchange that is meant to connect students to private lenders. It's not an application or a binding agreement, and the tool can also check whether certain schools are among those eligible for loans. Private lenders, including Discover, also have loan calculators to help would-be borrowers figure out how much they might need for school and, later, how much they will owe, depending on interest rates and the length of repayment. If you're a prospective online college student, this type of resource can be a great place to start exploring private loan options.
When it comes to private student loan payment, it all depends on who the lender is. Different banks and financial organizations have different repayment options for their borrowers. If possible, find out which lenders' repayment options might fit best before you sign on the dotted line.
Financial hardships such as getting laid off or having unexpected medical expenses can affect your ability to pay, but lenders know this, and these temporary roadblocks are no reason to fall behind on your payments. In many cases, lenders will work with you to see if there's a way to make their student loan repayment plan work with your budget.
"Most private education loans and all federal student loans do not go into repayment until the student is out of school, often allowing for a six-month grace period before the payments begin... [which] can be both positive and negative. Positive because it allows students to get established in a new job after leaving school, negative because... they are not required to budget for a student loan payment. When the day comes to make the first payment, it can often be a big shock to a student's budget that they hadn't adequately planned for." -Terry M. Micks, Loan Programs Coordinator, University of Wisconsin-La Crosse
If the amount you have to borrow in student loans is looking like more than you can handle, a loan forgiveness program might be able to help. "Loan forgiveness" means that a student is no longer required to repay part (or even all!) of their student loan. Not all student loans can be forgiven, and the process and requirements to do so are strict.
Some loans, like some of the individual state loans listed above, are essentially designed as grants, with the added requirement that a student commits to a certain type of job for a few years after college in order to get the money. If the student meets those obligations, the loan is forgiven.
Even if you can't get one of these grant-style loans, it's still possible to find student loan forgiveness plans. For instance, the Public Service Loan Forgiveness Program run by the federal government will forgive the balance of some federal loans after students have made 120 payments (which usually takes 10 years, with a monthly repayment schedule), if they commit to a public service career. This could include working for a government organization, a nonprofit or a private organization that provides a public service, like law enforcement or public education. In addition to the details on the Department of Education website, FinAid.org also offers a list of examples of industries that can lead to loan forgiveness.
When making a list of the pros and cons of federal versus private loans, remember that, in general, most private loans aren't eligible for forgiveness. If you're not intending to enter a career that offers loan forgiveness as an option, this might not matter. However, for online college students who are considering public service careers anyway, looking for loans from the federal government or the state of residence can be a helpful way to make school more affordable. Checking with your school's financial aid office can also be a helpful step, as they might be able to help find out whether a loan forgiveness program is an option for you.
If you have multiple loans (and multiple monthly payments that go with them), then student loan consolidation could help you combine all of those payments into one single monthly payment and potentially save a bit on interest in the process.
On federal student loans, you are generally able to consolidate shortly after you graduate, leave school or drop from full to part-time. Private loans each come with their own regulations on how early you can consolidate; however, many follow the same guidelines as federal loans.
During loan consolidation, borrowers take out a brand new loan and use it to pay off the boatload of separate, smaller loans they're already holding. The new consolidation loan comes with its own interest rate, fees, repayment terms, benefits and hardship protections, and it wipes out the terms and conditions of your old loans. Consolidation loans may offer lower interest rates, can be an easy way to switch from a variable interest rate to a fixed one if you desire, and can be a simple way to drop a cosigner who'd rather not be on your loan, but there are drawbacks. These loans also come with longer repayment periods, which means you'll pay more interest over the long haul, and you could lose valuable borrower protections you have on your existing loans.
There are two basic types of student loan consolidation. The government's Direct Consolidation program allows borrowers to consolidate most major federal loans, including Stafford, Direct and PLUS Loans, but not private loans. The interest rate on the new loan is determined by the weighted average of the interest rates on your old loans. A major bonus of consolidating through the federal government is that federal consolidation loans come with borrower protections like extended and income-based repayment options, deferment and forbearance programs and loan-forgiveness options.
If you have private as well as federal loans, private lenders also offer their own consolidation products, but grads who go that route may lose some or all of the borrower protections that come with federal loans. Unlike the federal government, private lenders frequently base the rates of their consolidation loans on the borrower's credit, which can mean less favorable rates for those who don't have stellar credit.
Deciding if you should consolidate is a whole other discussion. You'll first need to evaluate whether your current loans are manageable and if you really want the longer repayment period and extra interest costs that come with consolidation loans. For loans that you've nearly paid off or ones that come with shorter repayment periods, consolidation may not be the best bet. Borrowers who stick it out with repayment terms they already have oftentimes save big over the lifespans of their loans. However, if you do choose to consolidate, it's typically easier to do so before you go into default or get into financial trouble. The next step is to compare the interest rates, repayment terms and borrower protections on your current loans to those offered on consolidation products. While many consolidation loans can reduce your interest rate, some may actually increase it. Once your loans have been consolidated, there's no going back, so shop carefully.
No one likes to think about defaulting on their loans, but it does happen. Missing one payment or being a little late makes your account delinquent, at least temporarily, but that isn't the same as defaulting. For federal loans, default occurs when monthly payments aren't made for a period of 270 days, or when students with FFEL Program loans don't pay for 330 days.
Defaulting on a student loan damages your credit rating, and it could make it hard to do simple things like sign up for utilities. Collections agencies might also garnish your wages. It can be possible to get out of default on federal student loans, however. Loan rehabilitation requires you and the Department of Education to agree on a reasonable payment plan, and a loan can be officially rehabilitated after you've made these payments on time. However, in addition to the credit rating damage, you might still be billed for the collection costs as well, so defaulting on your student loan can cost a lot more than the original loan would have.
The definition of "default" can vary among private loans, but it will be spelled out in the loan agreement that you initially sign to receive your money — so don't forget to read that carefully. In some situations, garnishing wages and freezing bank accounts are possible responses from a collection agency if you're defaulting on a private loan.
If you're having trouble paying your loans back after graduation, private and federal lenders often offer some flexibility in repayment, though you might have to demonstrate financial hardship to get it.
If you're still in school or you're continuing your education at least half-time, one option is to ask your lender to put your loans in deferment, during which you don't have to make payments on your student loans. If it's a subsidized federal loan, the government pays the interest for you during this period.
If you don't qualify for a deferment, you can request forbearance, which can include reduced payments or a temporary break in repayment, depending on the circumstances and the loan. However, interest may still accrue during this period.
Income sharing agreements are a college financing tool that's touted as an alternative to student loans. Instead of borrowing funds to repay later, students enrolled in income sharing agreements (ISAs) receive college funding in exchange for a percentage of their future income. Currently available through a few private and nonprofit firms, ISAs seem to be gaining steam thanks to recent attention from legislators like former New Jersey Governor Chris Christie, and Purdue University's ISA program (first launched in the 2016-2017 school year). While advocates hail income sharing agreements as a way to sidestep the burden of student loans, critics argue that students should think hard before signing on. Let's take a closer look.
Income sharing agreements (ISAs) basically allow students to sell "shares" of their future earnings. Unlike loans, where borrowers chip away at a principal balance plus interest until the total is paid off, ISAs charge students a fixed percentage of their income for a set number of years after graduation. ISAs are generally open to students enrolled in both online and brick and mortar institutions, and oftentimes don't require a co-signer. To provide a financial safety net, many programs don't start the repayment clock until the new grad is earning over a certain threshold.
Because payments are based on discretionary income, ISA enrollees who earn more after college also end up paying a higher sum than they would with a traditional loan. In this way, higher earners could help lower-earning enrollees fulfill their obligations more quickly.
"Part of the problem with an income share agreement is that people try to characterize it as not being a loan when in fact it is a loan. It's a different kind of loan," says Mark Kantrowitz, student loan expert and president of MK Consulting. "…Some of these proposals are just for tuition or just for part of tuition and they don't cover the full college cost so you may still need to borrow. You may end up graduating with a lot of debt and an income share agreement."
Kantrowitz says that income sharing agreements frequently aren't a better deal than students would get with federal income-driven repayment plans. One major catch to the government's income-driven plans is that unless borrowers qualify for public service loan forgiveness, any dismissed debt is considered taxable income by the IRS.
"Federal Direct Student Loans are the best loans for students to pursue, which require the completion of the Free Application for Federal Student Aid (FAFSA). Student loans provided by private lenders are typically higher interest loans with more fees charged to the borrower." -Delisa F. Falks, Executive Director of Scholarships and Financial Aid, Texas A&M University
Federal income-driven plans can significantly lower a borrower's monthly payments, but interest on the loan continues accumulating. Pay less than the accumulating interest over a significant time period and you could wind up with a big loan and a sizable tax bill if the debt gets forgiven. Since ISAs technically don't have a principal balance or interest rate, this provision seemingly doesn't apply, though the legalities of that are "a little bit unresolved," says Kevin James, a former research fellow at American Enterprise Institute's Center on Higher Education Reform. Instead of seeing ISAs as an alternative to federal student loans, James sees them as viable alternatives to pricey private loans, credit cards, and other high-interest vehicles students use to pay college costs.
Kantrowitz says that students eyeing income sharing agreements should seek scholarships and grants they won't have to pay back first. If gift aid won't cover it, Kantrowitz recommends doing some serious research before enrolling in an ISA. In addition to understanding the exact terms of the agreement, "do a best case and worst case scenario analysis where if you're more successful than you dreamed of versus average versus below average," he says. Students should also research what happens if they don't graduate and whether it's possible to break their contract, because as Kantrowitz says, "a lot depends on the details."
Here are some additional resources to help you make an informed decision about student loans. Be sure to also check out the state-specific resources available to students where you live.
Understanding the differences between private, state and federal loans and the implications of different repayment options can help you make a more informed decision about how to pay for your online education. By minimizing loans and choosing the loans that best fit your situation, you should be in a better position to pay back your loans in the future.
For information on other types of financial aid, check out our other ultimate guides: