- How America Pays for College 2016, Sallie Mae, Accessed September 2016, https://www.salliemae.com/plan-for-college/how-america-pays-for-college/
- Interest Rates for New Direct Loans, Federal Student Aid, U.S. Department of Education, Accessed September 2016, https://studentaid.ed.gov/sa/about/announcements/interest-rate
- How much can I borrow?, Federal Student Aid, U.S. Department of Education, Accessed September 2016, https://studentaid.ed.gov/sa/types/loans/subsidized-unsubsidized#how-much
- Types of Aid: Loans, Federal Student Aid, U.S. Department of Education, Accessed September 2016, https://studentaid.ed.gov/types/loans
- House Passes Bill to Extend Perkins Loan Program, Education and the Workforce Committee, Accessed September 2016, http://edworkforce.house.gov/news/documentsingle.aspx?DocumentID=400072
- How do I apply for a Direct PLUS Loan?, Loans, Federal Student Aid, U.S. Department of Education, Accessed September 2016, https://studentaid.ed.gov/sa/types/loans/plus#apply
- Interest Rates for New Direct Loans, Federal Student Aid, U.S. Department of Education, Accessed September 2016, https://studentaid.ed.gov/sa/about/announcements/interest-rate
- Scholarships and Loans, Alabama Board of Nursing, Accessed September 2016, https://www.abn.alabama.gov/scholarships/
- Alaska State Education Loans, Alaska Commission on Postsecondary Education, Accessed September 2016, http://acpe.alaska.gov/FINANCIAL_AID/Loans/State_Education_Loans
- Arizona Student Financial Aid Programs, Arizona Commission for Postsecondary Education, Accessed September 2016, https://azgrants.az.gov/available-grants
- Financial Aid Division, Arkansas Department of Higher Education, Accessed September 2016, http://scholarships.adhe.edu/scholarships-and-programs/high-school/
- CHESLA Loan Basics, Connecticut Higher Education Supplemental Loan Authority, Accessed September 2016, http://www.chesla.org/CHESLA_Loan_Basics/CHESLA_Loans/Loan-Information/
- Student Access Loan Programs Regulations, Georgia Student Finance Commission, Accessed September 2016, https://gsfc.georgia.gov/sites/gsfc.georgia.gov/files/2017-Student%20Access%20Loan.pdf
- Scholarship for Engineering Education Loan Program (SEE), Georgia Student Finance Commission, Accessed September 2016, https://www.gafutures.org/media/113369/see-application-fy2017.pdf
- "Scholarship for Engineering Education," GAcollege411, Accessed September 2016, https://secure.gacollege411.org/Financial_Aid_Planning/Financial_Aid_101/Service_Cancelable_Loans/Scholarship_for_Engineering_Education.aspx
- Maine Financial Aid," Finance Authority of Maine, Accessed September 2016, http://www.famemaine.com/files/Pages/education/students_and_families/Maine_Financial_Aid.aspx
- Massachusetts No-Interest Loan, Massachusetts Department of Higher Education Office of Student Financial Assistance, Accessed September 2016, http://www.osfa.mass.edu/default.asp?page=nil
- SELF Loans, Minnesota Office of Higher Education, Accessed September 2016, http://www.ohe.state.mn.us/mPg.cfm?pageID=170
- New Jersey College Loans to Assist State Students, Higher Education Student Assistance Authority, Accessed September 2016, http://www.hesaa.org/Pages/NJCLASSHome.aspx
- Index of Loans, Grants, Scholarships and Work Study, New Mexico Higher Education Department, Accessed September 2016, http://www.hed.state.nm.us/students/fa_quicklist.aspx
- Types of Financial Aid: Loans, College for All Texans, Accessed September 2016, http://www.collegeforalltexans.com/apps/financialaid/tofa.cfm?Kind=L
- Medical Student Loan Program, College Foundation of West Virginia, Accessed September 2016, https://secure.cfwv.com/Financial_Aid_Planning/Financial_Aid_101/Loans/Medical_Student_Loan_Program.aspx
- Financial Aid Programs, State of Wisconsin Higher Educational Aids Board, Accessed September 2016, http://heab.state.wi.us/programs.html
- Private Student Loan Comparison Tool, New York State High Education Services Corporation, Accessed September 2016, https://www.hesc.ny.gov/pay-for-college/financial-aid/types-of-financial-aid/student-loans/private-student-loans/private-student-loan-comparison-tool.html
- Private Student Loans, SunTrust, Accessed September 2016, http://suntrusteducation.com/private-loans/custom-choice-loan/index.html?ref=CUSTOMCHOICE
- PNC Solution Loan, PNC, Accessed September 2016, https://www.pnc.com/en/personal-banking/borrowing/education-loan-center/pnc-solution-undergraduate-loan.html
- Private Student Loans, Wells Fargo, Accessed September 2016, https://www.wellsfargo.com/student/
- Private Student Loans, Citizens Bank, Accessed September 2016, https://www.citizensbank.com/student-loans/private-student-loan.aspx
- SallieMae Private Student Loans for Undergraduates, Sallie Mae, Accessed September 2016, https://www.salliemae.com/student-loans/smart-option-student-loan/
- Understanding Default, Federal Student Aid, U.S. Department of Education, Accessed September 2016, https://studentaid.ed.gov/sa/repay-loans/default
- Deferment and Forbearance, Federal Student Aid, U.S. Department of Education, Accessed September 2016, https://studentaid.ed.gov/sa/repay-loans/deferment-forbearance
- Income Share Agreements, Purdue University, Accessed September 2016, https://www.purdue.edu/dfa/types-of-aid/income-share-agreement/index.html
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: online college scholarships, grants and loans.
Many students use a combination of these three options. Scholarships and grants do not need to be repaid, but not all students can bank on getting 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 choose the loan carefully. Data from Sallie Mae's 2016 report “How America Pays for College” shows that two out of five families created a plan to pay for college. In families who plan, students borrow a third less than non-planning families.
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'll cover some of the most important topics when it comes to borrowing for college.
Since student loans must be paid back with interest, it's important to borrow only what you need and choose the loan carefully.
The following guide explains what you need to know about student loans, to hopefully minimize the amount you borrow and also help you make smarter choices about how to borrow and how much to borrow.
What to Know Before Taking out Student Loans
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 and minimize the amount you borrow. Here's what you should know beforehand.
Federal Student Loans
The U.S. government offers two types of undergraduate loans:
- Direct Subsidized Loans
- Direct Unsubsidized 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.
Direct Subsidized Loans
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 Unsubsidized Loans
On the other hand, Direct Unsubsidized Loans are available to undergraduate and graduate students regardless of financial need. Your school still determines the amount that can be borrowed, but the government doesn't help with paying the interest in this case. While you're enrolled in school, the unsubsidized loans accrue interest, which you can either pay as it accumulates or let it be added to the total amount of the loan after you leave school.
Direct PLUS Loans
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.
Federal Loan Interest Rates for the 2016-2017 School Year
Direct Subsidized Loans
Direct Unsubsidized Loans
Direct Unsubsidized Loans
Direct PLUS Loans
Federal Perkins Loan Program
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.
Federal loans are a relatively common source of financial aid for students at traditional colleges, but they can be used for some online colleges and distance-learning programs. The Department of Education warns that not every online or distance-learning option is eligible for federal aid — or is even accredited. In addition to checking out the quality of the schools that interest you, you need to contact individual financial aid departments to find out if you can use federal loans to fund your education.
State Student Loans
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 before banking on anything, remember to verify that these loans can be applied to online colleges.
Here are examples of some of the state loan options:
Student Loans in Alabama
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.
Student Loans in Alaska
The Alaska Supplemental Education Loan (ASEL) offers graduate, undergraduate and vocational loans to Alaska residents or students enrolled at eligible schools in the state.
Student Loans in Arizona
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. The Arizona Central's EDge Student Loan is another Arizona-specific state loan program.
To learn more about state loans, as well as other forms of financial aid in the state, read about financial aid in Arizona.
Student Loans in Connecticut
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.
Student Loans in Georgia
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.
Student Loans in Maine
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:
- The Maine Dental Education Loan Program is a forgivable loan that aims to help students pursuing an advanced dental degree if they work as a dentist in an eligible facility in an underserved area.
- The Maine Veterinary Medicine Loan Program is a need-based award established to help students in doctoral programs who want to practice livestock veterinary medicine in areas of the state without sufficient services.
- The Maine Health Professions Loan Program offers low-interest, need-based loans for students who are pursuing advanced degrees in allopathic, osteopathic or veterinary medicine, as well as dentistry.
Student Loans in Massachusetts
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.
Student Loans in Minnesota
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.
Student Loans in New Jersey
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.
Student Loans in New Mexico
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:
- The Allied Health Loan for Service aims to increase the number of physician assistants in designated shortage areas of the state.
- The Medical Loan for Service aims to raise the number of doctors in designated shortage areas of the state.
- The Nursing Loan for Service has a goal of boosting the number of nurses in designated shortage areas.
- The Minority Doctoral Loan for Service aims to add more female and minority teachers of engineering, science, math and other academic subjects that have typically low levels of instructors in this demographic.
Student Loans in Ohio
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.
Student Loans in South Carolina
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.
Student Loans in Tennessee
Several loan forgiveness plans exist in Tennessee. These include the following:
- The Tennessee Teaching Scholars Program offers loan forgiveness for graduates who teach in Tennessee.
- The Tennessee Math and Science Teacher Loan Forgiveness Program is designed for public school teachers who are pursuing an advanced degree in math or science.
- Nurses studying in the state should consider looking into the Tennessee Graduate Nursing 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 Tennessee.
Student Loans in Texas
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.
Student Loans in Virginia
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.
Student Loans in West 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.
Student Loans in Wisconsin
There are three options for loans offered through Wisconsin’s Higher Educational Aids Board that might be offered to online college students:
- The Minority Teacher Loan is for minority students who are enrolled at least half-time and pursuing a teaching degree.
- The Nursing Student Loan is offered to qualifying students who are enrolled at least half-time at an eligible school in the state and who agree to work as nurses within Wisconsin after they graduate.
- The Teacher of the Visually Impaired Loan can be offered to either graduate students or undergraduates. Students don't have to be enrolled in a Wisconsin college to qualify — just an eligible out-of-state school. Loan recipients do, however, have to commit to being a teacher for the visually impaired in Wisconsin or to work at an approved agency for a total of three years if they want the whole loan to be forgiven.
Other State-Specific Financial Aid Options
Although some states do not offer state-specific student loans, they may dedicate their resources toward creating grant and scholarship programs to aid students who are going to college. If there were no loan programs described above for your state, you may be interested in learning about alternative financial aid options available in one of the states below.
Private Student Loans
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.
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 many private lenders offer 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 student loan interest rates can vary.
Here's a collection of fixed and variable rate private student loan products to consider.
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, so do your homework to find the loan that makes the most financial sense for your situation.
Before you take out private loans, see how much money you can get from other sources such as grants, scholarships and federal student loans.
As with federal loans, it's crucial that you make sure that the loans you're considering can be used at your school of choice. This goes beyond just making sure that a school is accredited — some private lenders will only lend to students attending certain schools, and that list might not include every online college option, regardless of its accreditation status.
When you're ready to compare student loan options, the ELM Select Tool might come in handy. ELM Resources is a not-for-profit 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.
Student Loan Forgiveness
In addition to the loan options described above, a loan forgiveness program might also be an option, depending on the type of loan and your path after college. Some loans, like some of the individual state loans listed above, are essentially designed as grants, with a student committing to a certain type of job for a few years after college in order to get the money. If you meet those obligations, the loan is forgiven.
However, even if you don'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. 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.
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.
Student Loan Repayment Plans
Whether you borrow from the federal government, an individual state or a private lender — or all of the above — there are likely to be different options for how to repay those loans. A few loans, like the loan forgiveness programs mentioned above, might not have to be paid back at all if you meet certain eligibility criteria.
Most loans, however, do need to be repaid, and the system for doing so depends on where you got the money in the first place.
Federal Loan Repayment
Federal loans are actually paid back to a loan servicer — not the government. The loan servicer will depend on the type of loan disbursed and the school you attended, but it's easy to find out who the servicer is via the National Student Loan Data System on the Department of Education website.
Here are a few more important things to know about federal student loans:
- You get a grace period to start your payments — but it might start before you graduate. If you're not attending school at least half-time, the grace period can start prior to finishing your degree. Otherwise, you're given a set period of time — it varies from loan to loan, but is often six months — before you have to start paying back the loans. However, keep in mind that interest does accrue during this break.
- There are a lot of options for repayment plans. It might depend on a student's loan type, but the Department of Education offers fixed or graduated repayment plans, as well as options that are calculated based on income. It can take 10 to 25 years to pay off loans on some of these plans, and the longer you take to pay back a loan, the more you'll end up paying in interest. However, the flexibility in plan offerings can be helpful for students who need to find a happy medium between paying back their loans and not going broke doing it.
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.
Private Loan Repayment
When it comes to paying back private loans, 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 easily 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 the student loan repayment plan work with your budget.
Student Loan Consolidation
If you have multiple loans (and multiple monthly payments that go with them), then consolidating your loan 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 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.
How Consolidation Works
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.
Types of Loan Consolidation
There are two basic types of consolidation programs. 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.
Should I Consolidate?
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.
Student Loan Default and Deferment
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 will pay 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.
Alternatives to Student Loans: Income Sharing
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 New Jersey Governor Chris Christie, and Purdue University's announcement about launching an ISA program 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. Here's what you need to know.
A Look Inside Income Sharing
Income sharing agreements 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 earning more will fork over a higher sum than they would pay with a traditional loan. Higher earners could help lower-earning enrollees fulfill their obligations more quickly.
Federal Loans vs. ISAs
"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 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."
Student Loan Insights from College Financial Aid Experts
Applying for student loans can be a daunting process, so we turned to four experts working in financial aid and enrollment offices at major universities for their college loan tips. The overwhelming theme in their advice? Complete the FAFSA and get federal direct student loans first. The main reasons why include the following:
- Private lenders have higher interest rates with more fees.
- Federal loans offer delayed repayments for financial hardships.
- Private loans require cosigners, who will be responsible for your loan if you can’t pay it.
- Federal loans provide flexible repayment options.
Read on to learn more expert tips from these top college officials:
Overall, what is the major difference you'd point out between college loans and other types of loans?
Delisa F. Falks
Executive Director of Scholarships and Financial Aid
Texas A&M University
“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.”
Billie Jo Hamilton
Director of University Scholarships & Financial Aid Services
University of South Florida
“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.”
Ryan C. Williams
Associate Vice President of Enrollment Management
“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.”
Terry M. Micks
Loan Programs Coordinator
University of Wisconsin-La Crosse
“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. While the in-school deferment is important for students because they are not usually able to work full-time during school, the six-month grace period can be both positive and negative. Positive because it allows students to get established in a new job after leaving school. Negative because for six months after leaving school, 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.”
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.
- Federal Student Aid, an office of the U.S. Department of Education, provides free resources on filing the FAFSA, avoiding scams, understanding different types of aid and more.
If we have been able to help you understand the differences between private, state and federal loans and the implications of different repayment options, hopefully you will be able to 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: