The return on investment in a college education can be well worth it. In the United States, the median lifetime earnings for someone with a high school diploma comes in at around $1.5 million. For people with an Associate degree, the median earnings increase to $2.3 million, and for those with a Bachelor’s degree, the median earnings are nearly double those with the high school diploma – around $2.8 million. The earnings continue to increase for those with advanced degrees as well.
Some students need to take out student loans to cover the cost of their education, but how much in loans do students tend to need? It depends on the type of university. For those who used federal loans to attend public institutions, they owe an average of $27,884, while the average student who attended a private, nonprofit institution owes $40,607.
Like with any loan, it’s important that borrowers understand the terms of the loan and the implications on their financial situation – what it really means and what paying the loans back will look like after graduation.
We’ll dig into the types of student loans, interest rates, and loan repayment options so you have a better understanding of the financial commitment involved and you can be more informed when making choices about pursuing further education.
Types of Student Loans
There are multiple types and subsets of student loans, but primarily they are offered either by the federal government via the Department of Education or private loans offered by private lenders.
We recommend getting further information and details directly from the US Department of Education at https://studentaid.gov/.
Federal Student Loans
The most common type of student loan is offered by the federal government via the United States Department of Education. If you fill out the Free Application for Student Aid (FAFSA) at the time you’re applying for college and continuing your enrollment, the financial aid package for each school can include a combination of grants, loans, and work-study options.
Grants are “free” money that do not need to be paid back so long as you maintain the eligibility requirements. In contrast, loans do need to be paid back. Federal student loans come with interest that accrues, meaning you’ll end up paying back more than the amount you borrowed, also known as the principal.
Undergraduate students can take out Direct Subsidized Loans or Direct Unsubsidized Loans. With the subsidized loans, the Department of Education covers the interest while students are enrolled in school at least half-time, for a six-month grace period after graduation, and during times of eligible deferment – postponing the loan. For unsubsidized loans, interest begins accruing as soon as you take out the loan.
Congress sets the interest rates for federal student loans. These interest rates determine the cost of borrowing for federally subsidized and unsubsidized loans. The interest rates are typically influenced by economic conditions and can vary annually.
For the 2023-2024 academic year, undergraduate Direct Subsidized and Direct Unsubsidized Loans have a fixed interest rate of 5.50%. Graduate students face a slightly higher rate at 7.05%, while parents and graduate students utilizing Direct PLUS Loans encounter a fixed rate of 8.05%. These rates, determined by the U.S. Department of Education, aim to strike a balance between making education accessible and covering the government’s cost of lending. As most students are in school for multiple years, it’s important to consider that interest rates for student loans may change before you’re finished with your education. For federal student loans, interest accrues daily.
If you want or are able to pay more than the minimum payment for federal student loans, there are no prepayment penalties to paying off your loan early.
Private Student Loans
Private student loans serve as a supplemental source of funding for education, offering an alternative to federal loans. Unlike federal loans, private student loans are not backed by the government, and their terms and conditions vary widely among lenders. Interest rates for private loans are influenced by factors such as the borrower’s credit history, income, and the co-signer’s financial standing.
Private student loans often provide flexibility in loan amounts, but they come with a trade-off of potentially higher interest rates compared to their federal counterparts. The application process for private loans typically involves a credit check, and interest rates can be fixed or variable, depending on the lender.
One disadvantage to private student loans is that some require repayments while you’re still in school, before you graduate – meaning that you’ll need to find a source of income that works around your school schedule while you’re studying.
While private student loans can be a viable option for bridging financial gaps in education, anyone considering private loans should thoroughly research terms and conditions before committing. Unlike federal loans, private loans may not offer the same borrower protections, such as income-driven repayment plans or loan forgiveness programs.
Federal Student Loan Benefits for Military Members
If you’re a member of the United States military, there are additional student loan benefits and considerations. These include:
- Interest rate caps under the Servicemembers Civil Relief Act for federal and private loans
- Loan deferment for military service
- 0% interest for some direct loans
- U.S. Department of Defense student loan repayment programs
Review this guide from the U.S. Department of Education for servicemembers to find more specific details.
Student Loan Repayment Options
Navigating student loan repayment options can empower borrowers on their financial journey. There are various repayment plan options and loan forgiveness options for some borrowers. Understanding these can help borrowers strategically manage debt. Now, we’ll explore these choices.
The most basic loan repayment plan for Federal student loans is the Standard Plan. With the Standard Plan, you’ll pay off the loan in the shortest time period and because of that, you’ll pay the least amount of interest. The minimum payment is $50 per month, and the length of the repayment period under this plan depends on the total amount of education loans.
Income Driven Repayment
For borrowers who face hardship under the Standard Plan, the federal government offers income-driven repayment plans designed to make repaying loans manageable. The Department of Education offers four income-driven repayment plans, providing a flexible and income-sensitive approach to managing repayment.
Income-Based Repayment (IBR) is one of the most common types of this plan. With IBR, monthly loan payments are capped at a percentage of the borrower’s discretionary income, “generally 10 percent of your discretionary income if you’re a new borrower on or after July 1, 2014*, but never more than the 10-year Standard Repayment Plan amount.” The repayment period is typically extended to 20 or 25 years, after which any remaining balance may be eligible for forgiveness.
This extended timeline eases the financial burden on borrowers, allowing them to align payments with their income levels and family size. Moreover, IBR takes into account changes in income, allowing adjustments to be made annually to reflect the borrower’s current financial situation.
While income driven payment plans provide relief, it’s essential for borrowers to understand the long-term implications. Interest continues to accrue, and the income-based repayment amount may be lower than the amount of interest that accrues. That’s called negative amortization. Additionally, successful completion of the repayment period can lead to potential loan forgiveness, but taxes may be incurred on the forgiven amount. Overall, income driven repayment plans are a crucial option for those navigating the complexities of student loan repayment, offering a tailored approach that promotes financial stability.
Extended Repayment Plan
The Extended Repayment Plan offers Direct Student Loan borrowers an extended timeline for repayment, providing greater flexibility. Under this plan, individuals can extend their repayment period up to 25 years, allowing for lower monthly payments. Borrowers can choose fixed or graduated payments, tailoring their approach to align with their financial circumstances. While the extended term eases immediate financial strain, it’s essential to note that interest continues to accrue, potentially resulting in a higher overall repayment amount. This option is beneficial for those seeking manageable monthly payments over an extended period, providing relief without the constraints of standard repayment schedules.
Student Loan Forgiveness
Student loan forgiveness program, notably Public Service Loan Forgiveness (PSLF), offers a pathway to alleviate the burden of educational debt for eligible borrowers. As of May 2023, over 615,000 borrowers have had their loans forgiven through this program, with new improvements making the process more streamlined for borrowers.
PSLF is designed for individuals working in qualifying public service jobs, including for the federal, state, local, or tribal government, 501(c)(3) nonprofit organizations, and certain public interest roles.
Additionally, the Teacher Loan Forgiveness program supports educators working in low-income schools, forgiving up to $17,500 of federal student loans after five consecutive years of teaching.
Understanding the various student loan forgiveness options empowers borrowers to make strategic choices aligned with their career paths and financial goals.
Alternatives to Student Loans
For those who are looking for ways to cover their education while minimizing (or forgoing) the impact of student loans, there are some alternative ways to cover the cost of your education if you’re open to a different structure and willing to pursue them.
The first thing that all students should do is look for scholarships for which they may qualify. Some schools will provide academic or need-based scholarships to applicants and students. Other organizations will offer scholarships to people who qualify based on merit, essays, their background, or demographic information. You can find scholarships from lots of places, including the College Board which can match you with scholarships based on your information. No matter how you’re pursuing your education or paying for it, scholarships can make an impact!
The next step to lower the cost of education is to choose a school based on affordability. Some people choose to go to less expensive schools, and/or start their degree with community colleges, to make the cost of their education more manageable. But remember, it’s not just the tuition you have to consider – things like your living expenses, commuting or transportation, and the rate of on-time graduation all play a role in the total cost of your education.
Some online programs have unique structures that make them more affordable. One example is Western Governor’s University, an accredited nonprofit university with a competency-based program that allows students to finish classes faster and in turn, pay less tuition. We walk through how to compare the costs of different schools in our Savings Tips for College Students blog – check it out!
Employer-Paid Tuition Benefits
Another route to minimize reliance on student loans is to pursue employment programs that offer tuition reimbursement or education benefits to cover the cost of school. The IRS allows companies to offer up to $5,250 in tax-free tuition reimbursement. Some employer education programs with work opportunities nationwide are:
- Amazon Career Choice
- Starbucks College Achievement Plan (get a Bachelor’s degree through Arizona State University online)
- McDonald’s Archway to Opportunity
- UPS Earn and Learn Program (lifetime maximum of $25,000!)
- Hilton Guild Education
This is by no means a comprehensive list – many employers offer some kind of tuition assistance. Before signing up, take time to understand the employer’s program limitations and requirements. These programs can be a great way to cover some or all your education costs while gaining work experience.
A college education can be a big investment in your future, and many students turn to student loans to be able to cover the cost. For borrowers or potential borrowers, it’s essential to understand the terms with student loans because they can be a significant part of your financial situation during and after college. Researching loans and alternative or supplemental ways to fund a college education will help you make informed decisions and build financial literacy.
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