If you want to save money, consider going to community college and transferring to a four-year college after earning all of your General Education credits. Although you may be wondering, “is community college really free?”
Over 100 colleges in the United States offer transfer options for community college students, including all of the Ivy League schools and other private/public colleges.
While the community college route is a lot cheaper than the traditional four-year route, this doesn’t necessarily mean community college is free.
The cost of community college depends on many factors, such as what state you plan to attend school in, your financial need, your field of study, as well as your involvement in any special programs.
Here’s what you need to know about attending community college.
Is Community College Free?
Community college in general is not free, but almost 30 states in the United States offer free community college programs based on income, merit, geography, and specific program requirements.
Source: CNBC
It’s important to note that you must meet all of the specified requirements laid out by your community college to qualify for having your tuition covered. For example, California offers the California College Promise Grant (CCPG), which waives tuition for community college and other fees if you meet the eligibility requirements.
Even if the cost of tuition is covered, students may be expected to cover non-tuition costs such as room and board, school supplies, meal plans, and other fees.
To find out what kind of community college programs your state or region offers, search up ‘[Your state/city] promise program community college.’ You can also look for private grants and scholarships that are specifically geared toward students who plan to attend community college and transfer.
Where is Community College Free?
Community college can be free in the following 29 states: Washington, Oregon, California, Nevada, Wyoming, Colorado, New Mexico, Kansas, Oklahoma, Minnesota, Iowa, Missouri, Arkansas, Louisiana, Indiana, Kentucky, Tennessee, New York, Vermont, Connecticut, Rhode Island, New Jersey, South Carolina, North Carolina, West Virginia, Maryland, Delaware, Michigan, and Hawaii.
Frequently Asked Questions About Community College
Is Free College Actually Free?
Community college is not actually free. The coverage of community college tuition can depend on your state, income requirements, academic requirements such as high school grade point average (GPA), field of study, age, and more importantly, the community college you plan to attend.
Before anything, you’ll need to be accepted into the community college before considering aid. Make sure to apply to multiple community colleges that you’d like to attend and submit your application on time.
After you’re accepted, you can see if you qualify for financial aid. Every community college has different college promise programs, so be sure to look into your specific community college to see what financial aid options are available to you.
Contact your financial aid advisor for more information.
What are the Top Community Colleges?
According to Niche, the top five community colleges are:
Ohio State University – Agricultural Technical Institute in Wooster, Ohio
Fox Valley Technical College in Appleton, Wisconsin
Texas State Technical College in Waco, Texas
Lake Area Technical College in Watertown, South Dakota
New Mexico Military Institute in Roswell, New Mexico
Which State Has the Cheapest Community College?
According to the Education Corner, Texas has the cheapest community college, with the Wharton County Junior College having a net average cost of $3,969.
Can You Get a Bachelor’s Degree at a Community College?
Yes, you can get a bachelor’s degree at a community college, depending on which community college you go to. Currently, 24 states have community colleges with approved baccalaureate programs.
Traditionally, community colleges only offered associate’s degrees and certificates for students who completed two years of education and 60-semester credits of study. Bachelor’s degrees could only be earned at traditional four-year schools. Now, with workforce demands and calls for educational affordability and access, almost half of the states in the U.S. have allowed community colleges to award bachelor’s degrees.
For example, in Arizona, the Maricopa Community Colleges District offer bachelor’s degrees in Data Analytics and Programming at Mesa Community College, Information Technology at Estrella Mountain and Phoenix Community College, Public Safety Administration at Phoenix and Rio Salado Community College, and Behavior Sciences at South Mountain Community College.
However, it’s important to note that most four-year institutions do not allow students to transfer to the institution if they already have a bachelor’s degree, so it’s important to look into the program requirements and keep this in mind before you pursue a bachelor’s degree at a community college.
If you don’t plan to transfer to a four-year institution, consider getting a bachelor’s degree or an associate’s degree at a community college.
What is the Difference Between a Bachelor’s Degree and an Associate’s Degree?
Bachelor’s Degree
Associate’s Degree
Four-year long program
Two-year long program
A step above an associate’s degree
A step below a bachelor’s degree
More career opportunities
Fewer career opportunities
More focused area of study
General focus area of study
More expensive
Less expensive
Do I Have to Submit my FAFSA If Attending Community College?
Yes, you must absolutely submit your Free Application for Federal Student Aid (FAFSA) even if you are attending community college. Even if the cost of community college won’t be necessarily “free,” submitting your FAFSA can get you financial aid that covers a significant portion of your tuition if you qualify.
Your FAFSA is necessary so that the federal government, state governments, and institutions can gauge your financial need and calculate your financial aid package.
On top of submitting your FAFSA, it’s important to also look into your school’s outlined requirements for financial aid applications. For example, at the University of California Santa Barbara, transfer students who want to receive aid must fill out the scholarships section of the UC application, in addition to submitting the Free Application for Federal Student Aid or the California Dream Act Application.
If you think that attending community college is the more suitable path for you, pursue it. Plenty of students go to community college and transfer to a four-year institution after earning their General Education credits, saving two years’ worth of tuition. Be sure to stay on top of the application processes for community colleges and check the qualifications for financial aid with each individual program. Even if community college is not necessarily “free,” you can still earn money to pay for college by applying for scholarships and grants.
College is a special four years of your life, and you’ll want to make the most out of your experience. Here’s the ultimate college bucket list to make memories that will last you a lifetime.
#1: Study Abroad
Studying abroad can be a once-in-a-lifetime experience. Not only do you get to study in another country with your friends, but you get the chance to immerse yourself in a new language, with new people, and a new culture.
It’s a great opportunity to escape your comfort zone and put yourself out there.
#2: Eat at Every Local Restaurant in Town
Spend your four years in college getting to know the city you’re inhabiting.
While it is a hefty goal, aim to hit every food spot available, whether it’s an ice cream shop, an Indian restaurant, or a brewery. It’s a great way to get to know the food scene in your college town and can be a great bonding opportunity for friends.
#3: Go On A Road Trip With Friends
Develop your lifelong friendships by going on a road trip. Whether you’re going on a short trip to the mountains or the beach, road-tripping is a great way to bring your friend group together, make memories, and explore the state you’re in.
#4: Make the Dean’s List
While the college experience might be all about making unforgettable memories and having fun, remember the reason that you’re there in the first place is to learn.
Making the dean’s list is a great way to challenge yourself academically and dedicate yourself to your studies. It’s an attainable goal if you put in the hard work, and the benefits of it are definitely worth it.
#5: Dye Your Hair, Pierce Something, or Get a Tattoo
College is one of the only periods in your life when you can make crazy decisions without being judged too harshly. Take the chance and do something crazy. Whether you dye your hair bright pink, pierce your ears, or get your first tattoo, it’ll be a look to remember.
#6: Enjoy Your Student Discount
Your .edu email can save you some money on your next ASOS or Dr. Martens purchase. Certain stores and online subscriptions give you a discount just based on the fact that you’re a student. Go save some money!
#7: Apply For Your First Credit Card
Getting your first credit card is an important step to building a strong credit score and history in college. Now that you’re an adult, it’s important to focus on your financial well-being and learn to manage your finances.
#8: Participate in School Traditions
UCLA has its traditional undie run, while Duke University has the bench-burning ceremony when the basketball team wins against UNC-Chapel Hill. Take part in your school’s timeless traditions to feel more connected with your college and the history it has.
#9: Take a Picture With Your School Mascot
A picture with your school mascot will definitely be one for the books. Whether it’s a mascot statue or the mascot in costume, it’s a classic experience to add to your bucket list.
#10: Attend a Random Lecture
When you have a free day, drop into a random lecture and learn something new. When you’re in an environment where learning is happening all around you, you can most definitely sit in on a random lecture without drawing any attention.
You may be surprised by what you learn.
#11: Play An Intramural Sport
The best part about intramural sports is that you don’t have to be good at them. Usually, anyone can sign up, as long as they have a team.
Participating in intramural sports is a great way to exercise, socialize, and have fun. Consider getting a group of friends (or strangers) to form an intramural team for a sport you enjoy.
#12: Check Out the Career Fair
While the idea of a career fair might sound cheesy, they’re an incredibly valuable opportunity to network with companies and hiring managers, which could help you land a job post-grad.
Career fairs are a great way to gain exposure to different companies and explore different employment opportunities. Remember to wear your best business attire and print out copies of your resume.
#13: Venture Out to a Neighboring City
Take a little weekend trip to any neighboring cities around your college. Explore what makes the city unique, whether it’s an annual fair, a national monument, or a classic museum. If you’re balling on a budget, explore sites like Groupon and your local library for discounted tickets to events and experiences.
#14: Go To A Tailgate
Tailgates are pre-game celebrations that usually take place in a parking lot before different sports games. They usually have music, food, and drinks to ramp up the school spirit.
#15: Get Published
Whether it’s photography, poetry, an op-ed, or a podcast, submit your work to an organization on campus and get published. Plenty of clubs are looking for artist pieces to publish – take advantage of these opportunities!
There are two types of student loans: private and federal. While private student loans are provided by private entities such as banks and financial institutions, federal student loans are provided by the federal government. If you think you may need a student loan to pay for college, check your student loan eligibility ASAP.
How to Check Your Eligibility
Private Student Loans: Each private student lender has its own unique eligibility requirements. Therefore, the easiest way to check your eligibility for multiple private student loans at once is to use the Sparrow application. Sparrow will show you the lenders you’re eligible to borrow from and the exact interest rate you’d qualify for with each one.
Federal Student Loans: To check your eligibility for federal student loans, you must complete the FAFSA.
Who is Eligible for a Student Loan?
Private Student Loans
Private student loans are provided by a lender such as a bank, credit union, state agency, or a school. Each lender has different rates and eligibility requirements. However, in just two minutes, you can check your student loan rate and eligibility with 17+ lenders by using the Sparrow application.
The latest rates from Sparrow’s partners
See a rate you like? Click Apply and we’ll take you to the right place to get started with the lender of your choosing.
Compare your personalized, pre-qualified rates from these lenders in minutes.
While each private student lender will have its own unique eligibility, there are a few that tend to be the same across the board:
Enroll in an eligible program:Private student loans can only be used for education costs. Therefore, you’ll need to enroll in an eligible academic program to be considered for private student loans.
Be a U.S. citizen, permanent resident or eligible international student. Most private student lenders will require you to be a U.S. citizen or permanent resident with a Social Security number.
If you are an international student, you’ll be eligible with many lenders if you have a cosigner who is a U.S. citizen or permanent resident. If not, MPOWER and Prodigy also provide student loans to international students without an SSN or credit history.
Federal Student Loans
To qualify for federal student loans, you must:
*Demonstrate financial need (for most programs). Whether or not you must prove financial need depends on the type of student loan. Specifically, to qualify for Federal Direct Subsidized Loans, you’ll need to show financial need. To receive Direct Unsubsidized or PLUS Loans, you do not need to demonstrate financial need.
*Your financial need is calculated based on the information you provide on the FAFSA.
Be a U.S. citizen or *eligible noncitizen. In general, you must be a U.S. citizen or eligible noncitizen to qualify for federal student loans. However, in some cases, legal U.S. residents without citizenship may qualify.
* An eligible noncitizen is a U.S. national, U.S. permanent resident, or an individual holding an Arrival-Departure Record from U.S. Citizenship and Immigration Services under one of the following titles: Refugee Asylum Granted Cuban-Haitian Entrant Conditional Entrant (valid if issued before April 1, 1980) Victims of Human Trafficking (T-Visa -2, -3, or -4 holders) Parolee (with certain conditions)
Have a Social Security number. In most cases, you need a social security number to be eligible. However, there are a few U.S. territories in which you would not need a Social Security number.
Enroll in an eligible academic program. Federal student loans can only be used for accredited or recognized, degree-granting programs. Therefore, if you aren’t attending one of these schools, you won’t be able to receive federal student loans.
Have satisfactory academic progress. Each individual school will have its own academic requirements. Accordingly, if you do not meet those, you can be denied federal financial aid including federal student loans.
Enroll at least half-time (for Federal Direct Loans only). For Federal Direct Loans, you must be enrolled at least half-time.
Complete the FAFSA. The FAFSA collects and processes your financial information to determine your eligibility for need-based aid. In order to qualify for any federal student loans, you must complete the FAFSA.
Meet all qualifications for your specific program. To be considered a student at your respective school, you must meet their enrollment requirements. Generally, this may mean having a high school diploma or GED. You must meet all of your school’s requirements in order to be eligible for federal student aid.
Note: Selective Service registration is no longer required to qualify for federal student loans.
How is Student Loan Eligibility Determined?
Eligibility for private student loans depends on the lender. Each lender looks at your application against a different set of criteria. Check your student loan eligibility across multiple lenders at once. In general, here are the main factors that determine your eligibility:
Eligibility for federal student loans will depend on whether you meet the FAFSA criteria. After filling out the FAFSA, your information will be used to determine if you qualify for federal student loans. Then, it will determine what type of loans you are eligible for and how much aid you are eligible for overall.
What Disqualifies You From Getting a Student Loan?
Student loan applications can be denied for a variety of reasons. The most common reasons are not meeting the basic eligibility criteria for the respective loan. However, there are other ways you can be disqualified from obtaining a student loan.
Private Student Loans
Each private lender has their own unique requirements to qualify for a student loan. Lenders will look at a variety of factors to determine whether you are eligible to borrow from them. This includes, but is not limited to:
Your employment history
Your credit score
Your debt-to-income ratio
Your enrollment status at a qualifying school
If you do not meet the basic eligibility criteria within these categories, you may not qualify for a private student loan with that specific lender.
Federal Student Loans
If you do not complete the FAFSA, you will not be able to receive federal student loans.
Additionally, being convicted of certain crimes can also be cause for disqualification. Drug-related crimes, such as sale of illegal drugs or drug possession, can disqualify you from receiving federal aid in the future.
Is There an Age Limit for a Student Loan?
For many private student loans, you must be at least 18 years old to take out a loan. This number can vary from state to state.
For federal student loans, you must submit the FAFSA. In order to submit the FAFSA, you need an FSA ID. Applicants must be at least 13 years old to obtain an FSA ID. However, there is no upper age limit for federal student loans.
Final Thoughts from the Nest
Federal and private student loans each have their own eligibility requirements. Before submitting the FAFSA or applying for a private student loan, make sure you meet the basic eligibility requirements.
Sparrow’s goal is to give you the tools and confidence you need to improve your finances. Many or all of the products featured here are from our partners who compensate us. Accordingly, this may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. While we make an effort to include the best deals available to the general public, we make no warranty that such information represents all available products.
Sparrow partners with financial institutions to provide students and their families with a streamlined search and comparison process that helps borrowers find the best private student loan offers in minutes.
We believe transparency is key to earning and maintaining borrowers’ trust. That’s why we take who we partner with seriously.
The lenders that borrowers choose are very important. The right lender could save borrowers money, time and stress. The wrong lender can be predatory, usury, and misleading. We pride ourselves on working with a diverse set of fantastic lenders to ensure that our borrowers receive the most competitive offers for their unique financial situation.
How We Select Lenders to Partner With
Our lenders are evaluated against a rigorous set of criteria to ensure that they truly are the “best companies” for private student loans and student loan refinancing. In order to be eligible for onboarding onto our marketplace, a lender must pass all 15 criteria explained below. After onboarding, each lender’s eligibility is re-evaluated on a quarterly basis.
Offers private student loans and/or student loan refinancing to schools eligible for federal funding under Title IX
Complies with relevant state and federal law: TILA, ECOA, FRCA, GLBA, UDAAP, FCT Act, and CAN-SPAM Act
Services loan payments internally or through reputable third-party servicers including: FedLoan Servicing, Nelnet, Navient, MOHELA, Edfinancial Services, OSLA, Great Lakes, and GSMR among others
Loan origination receives school or self-certification pursuant to Section 155 of the Higher Education Act of 1965
Does not have outstanding or unresolved litigation with the Consumer Finance Protection Bureau (CFPB)
Maintains a strong customer satisfaction rating on either Better Business Bureau and/or Trustpilot
Qualifies borrowers with limited (less than 2 years of active credit) or no credit history
Qualifies borrowers with limited or no annual income
Maintains necessary lenders licenses for states where loan products are provided
Provides at least one repayment option: Immediate, Fixed, Interest Only, or Fully Deferred
Offers cosigned and/or non-cosigned loans
Offers e-signature option for digital loan origination
Does not include prepayment penalties
Offers robust financial literacy programs and resources
Offers death and disability discharge
How We Score Potential Lenders
Our checklist serves as a baseline. We go well beyond it to identify lenders with whom we’d like to partner. The following below is a breakdown of the methodology we apply to identify compelling partnerships.
Affordability (35%)
Interest rate (30%)
Fees (5%)
Customer service (30%)
Borrower origination experience (15%)
Borrower repayment experience (15%)
Eligibility (20%)
Loan term (5%)
Minimum and maximum loan amounts (5%)
Minimum FICO score (10%)
Miscellaneous (15%)
Product availability (10%)
Regulations and compliance (5%)
Affordability (35%)
Affordability primarily considers the interest rates and loan fees that affect borrowers’ monthly loan payments. For many borrowers, the best loan is the one that costs the least over time. The following factors determine affordability.
Interest rate (30%)
We look at how competitive a lender’s interest rates are versus other lenders’ for various types of borrowers (i.e. borrowers with different FICO scores).
Why interest rate competitiveness matters for borrowers: Choosing a loan with a competitive interest rate can result in significant interest savings over the lifetime of a loan.
Fees (5%)
Fees can tack on costs to a borrower’s loan. None of the lenders on the Sparrow marketplace have prepayment penalties.
Why fees matter for borrowers: Borrowers should shop around to find the lowest-cost lender, accounting for interest rate and any associated fees.
Customer Service (30%)
Customer service considers how borrower-friendly a lender is in the origination and repayment processes. Customer service is a heuristic for the trustworthiness and credibility of a lender.
Borrower origination and repayment experience (15%)
Borrower origination and repayment experience addresses the ease at which lenders qualify, disburse and service loans. Borrowers ought to be able to expect friendly, non-predatory servicing as they work with their lenders to repay their loans.
Why borrower origination and repayment experience matters for borrowers: Because private student loans are a credit of last resort, borrowers have to be able to rely on lenders to originate and service a loan on-time. Having the wrong origination or servicing experience can weigh on borrowers for years to come.
Customer service rating (15%)
Customer service ratings show the quality of experience a borrower can expect from a lender. Sparrow studies Better Business Bureau and Trustpilot customer service ratings for student loan companies.
Why customer service matters: Borrowers should be able to trust their lenders and expect good customer service from them.
Eligibility (20%)
Eligibility considers a lender’s flexibility to meet the various needs of different borrowers.
Loan term (5%)
We evaluate the term options that lenders provide borrowers to repay their loans.
Why loan term matters: A broad range of loan terms offers flexibility for every borrower’s unique financial situation.
Minimum and maximum loan amounts (5%)
We assess the minimum and maximum loan amounts offered by lenders.
Why maximum and minimum loan amounts matter: A lender’s loan amount should be large enough to meet borrowers’ needs and small enough so that borrowers do not take on unnecessary debt.
Minimum FICO score (10%)
We look for lenders with low or no credit score minimums.
Why minimum FICO score matters: If borrowers’ credit score falls below the threshold, they will have trouble qualifying for a loan.
Other Factors (15%)
Sparrow looks at a range of other factors to determine a lender’s overall rating.
Product availability (10%)
Product availability describes the coverage lenders provide to students studying for different degrees (i.e. undergraduate, graduate, pre-professional, etc.) or coming from different circumstances (access to a cosigner).
Why product availability matters: Borrowers may benefit from borrowing loan products tailored specifically to their degree (i.e. JD, MD, BA, MS, etc.) or economic background (cosigned vs. non-cosigned loans).
Compliance and regulations (5%)
We ensure that all lenders on the student loan marketplace are legally compliant with federal and state law. We work with each of our lending partners in order to comply with requirements related to loan disclosures and terms, credit discrimination, credit reporting, and unfair or deceptive business practices.
Why regulations and compliance matter: Borrowers should have the confidence that Sparrow and its partnered lenders are compliant with federal and state law and will not be subject to usury or deceptive lending practices.
Sparrow’s goal is to give you the tools and confidence you need to improve your finances. Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. While we make an effort to include the best deals available to the general public, we make no warranty that such information represents all available products.
You got accepted into your dream school. You’re so excited you can hardly contain it. A few days go by and the reality sets in. How am I going to pay for this?
You log into your school’s payment portal and look at the total cost of attendance. Before you panic, let’s break down all the steps you’ll need to take to pay for college.
Before College
Step 1: Complete the FAFSA
Each year, the U.S. Department of Education offers financial aid to college students. The FAFSA, or Free Application for Federal Student Aid, is a form you will need to fill out to be considered for this aid.
The FAFSA determines which students receive financial aid and how much they get. The information you provide in the form is also used by colleges and universities to determine eligibility for their scholarships and aid programs.
The FAFSA opens each year on October 1st. Students should fill out the FAFSA the year before they plan to start school. For example, if you plan to be in school by October of 2022, you’ll want to fill out the FAFSA in October of 2021.
We recommend that prospective students fill out the FAFSA as soon as they can after it opens. Note that you do not need to know exactly where you plan to enroll to fill out the FAFSA. In fact, you will likely fill out the FAFSA before you even apply to some schools.
Most people elect to fill out the FAFSA online, although there are other ways to complete it. For a more in-depth guide to the FAFSA, check out 6 Simple Steps to Fill Out the FAFSA.
Step 2: Apply for Grants and Scholarships
Grants and scholarships are also known as “free money” because they don’t need to be repaid. They tend to be merit-based, need-based, or a combination of both.
What does that mean?
Merit-based → awarded based on academic achievement or excelling in an interest, trait, or talent
Need-based → awarded based on financial need
The amount of money you can get in scholarships and grants ranges quite a bit. Some grants and scholarships will cover the cost of books, and others will cover the entire cost of tuition. According to Education Data, students receive $7,500 worth of scholarships and grants, on average.
To find college scholarships and grants, you can do the following:
Ask your high school guidance counselor for local resources. Local organizations such as Veterans Clubs, Rotary programs, and small businesses may offer scholarships.
Look to your employer or your parents’ employers. You’d be surprised how many companies offer scholarships!
Research organizations that cater to identities you hold, such as:
Ethnicity-based organizations
Women’s/Men’s Clubs
Volunteer or Service-based organizations (nonprofits, community organizations, civic groups)
Note that deadlines for each scholarship will be different. We recommend making a Google Sheet to track each scholarship or grant you plan to apply to, the deadline, and the materials required to apply.
Step 3: Get a Work-Study Job
After filling out the FAFSA, you may qualify for work-study. Work-study is a federal aid program that provides part-time jobs to college students with financial need. Qualifying for this program doesn’t guarantee you will receive a job, but it does open the door to various job opportunities not all students have.
To read more about work-study, check out this article.
Once you’ve selected which school you want to attend, look through their job portal online to find work-study jobs available to you.
Note: Again, not all students will qualify for work-study. Only those who demonstrate significant financial need based on their FAFSA will be eligible. If you are not eligible for work-study, there will still be other job opportunities you can take advantage of on or off campus.
Step 4: Examine Your Savings
Taking out private student loans is part of the average person’s college experience. But, as much as you can, you want to minimize how much you need to take. Examine your savings and see how much you can put towards paying for college.
Additionally, be smart about what you spend leading up to college. Maybe you just had a high school graduation party and received generous gifts. Instead of spending that money, consider putting it towards paying for college. (Trust me, your 22-year-old graduated self will thank you.)
Step 5: Take out Federal Student Loans
After filling out the FAFSA, you will receive a financial aid package from the schools you applied to. Within these aid packages, you may see grants and federal student loans.
Federal student loans tend to have lower interest rates and more favorable terms in comparison to private student loans. Thus, many students opt to take whatever federal loans are offered to them.
You should remember to accept federal financial aid in the following order: grants/scholarships (free money) → work-study (earned money) → loans (borrowed money)
Loans should always be accepted last after any scholarships, grants, or work-study.
Step 6: Borrow Private Student Loans
The average college student will take out private student loans to cover their remaining balance. But, private student loans should always come after federal loans as they need to be repaid and tend to have higher interest rates.
Each private loan will offer different elements that will vary in importance depending on the person. This means that there isn’t a single best private loan option; it varies by person.
Finding the best private student loan for you is a seamless process on Sparrow. Create an account, and in under 3 minutes, you can compare all your loan options in one place.
Payment Deadline Reminder
May 1st is the deadline for accepting a college’s offer for fall admission and for paying the tuition deposit to enroll.
This deadline is crucial to keep in mind because it impacts other parts of the process of paying for college. Be proactive and do things earlier than you think you may need to.
Every Summer While in College
Register and Pay for Classes
To be considered a full-time student and pay the same tuition rate, you need to make sure you enroll in classes. Try to register for classes as soon as your university will allow you to.
Before enrolling, consult with an advisor to ensure you’re taking the right classes to stay on track to graduating on time. If you plan ahead, you may be able to graduate early which would save you a lot of money in the long run.
Universities will typically send out tuition bills in July or August with the expectation that they are paid by the fall. If you have questions or concerns about when your tuition will be due, reach out to your university’s financial aid office.
Submit FAFSA for Next Year
If you’re using the FAFSA for any financial aid or loans, it will need to be resubmitted every year that you’re in college. This is because your financial situation may change from year to year, thus impacting the amount of money you qualify for.
If you submitted the FAFSA previously, you may be eligible to submit a Renewal FAFSA rather than having to fill out the entire form again. To reapply, simply log into the FAFSA portal online and click FAFSA Renewal.
Find a Job or Work-Study
If you previously qualified for work-study but haven’t accepted a position, check for opportunities for the next school year. If you didn’t qualify when you initially filled out the FAFSA, but your financial situation has changed, you should resubmit the FAFSA as you may qualify now.
If you aren’t eligible for work-study, looking for an on or off campus job may help you pay for college or manage expenses such as books or food.
After You Leave School
Review Your Loan Repayment Plan
Regardless of whether you have federal or private student loans (or both!), you’ll want to review your repayment plan options. Find one that works for you and stick with it!
This is also a good time to determine how you want to allocate funds to make payments. We recommend using the Debt Avalanche method as it is most effective, but this won’t be for everyone. Do some research on the different methods and again, find one that works for you and stick to it!
Find a Job
Most of us attend college with the hopes of finding a job we love. Of course, we hope that it can financially support us as well. You will likely start the job search before graduating, but if you haven’t, post-grad is a great time to start looking.
Use sites like LinkedIn and Indeed to find roles that both suit you and will help you pay off your loans.
Consider Refinancing Your Loans
If your interest rates seem out of this world (and not in a good way), you may want to consider refinancing. Refinancing would allow you to take out a new loan with a lower interest rate to cover all of your initial loans. If the concept of refinancing sounds overwhelming, check out our guide.
Summary
There is no one-size-fits-all solution to paying for college. You may end up with enough scholarships and grants to completely cover your college costs. Or, you may not get as much through the FAFSA as you expected, leaving you to take out more in private student loans.
Either way, there is no one solution to paying for college. This means that however you decide to pay for school, as long as it works for you, you’re making the right decision.
The academic year is the portion of the year while classes are in session, typically from around August to May.
Acceleration
Loan acceleration is when your lender demands immediate repayment of the outstanding balance of your loan. This can happen in circumstances such as:
If you receive loan money, but do not attend any classes at the school where the loan was disbursed.
If you use the loan money to pay for things other than educational expenses at the school you agreed to attend.
If you default on your loan.
If you make a false statement which allows you to receive loan money you are not actually eligible for.
Age of Majority
The age of majority is the age at which a minor is considered an adult. The age of majority will vary based on the country and state you are located in. In most cases, the age of majority is 18.
Aggregate Limit
An aggregate limit, also called a cumulative limit, is the total amount you can borrow from a lender or loan program. For example, if a lender has an aggregate limit of $100,000, you cannot borrow more than $100,000 total from that lender.
Amortized
When a student loan is amortized, it means that a portion of the monthly payment is put towards the loan principal, while the other portion is put towards the interest. An amortization schedule is a record of loan payments that shows how the loan balance will decrease over time with regular payments.
Annual Taxable Income
Annual Taxable Income is the amount of gross income the Internal Revenue Service (IRS) deems subject to taxes.
Application Fee
An application fee is a one-time, up-front fee you pay to apply for a loan. Application fees are usually non-refundable.
APR
An Annual Percentage Rate, or APR, is the interest rate applied to a student loan, plus additional fees. APR is expressed as a percentage and is calculated on a yearly basis.
APR Cap
An APR cap is a limit on how high an interest rate can rise on a variable rate loan. For example, an APR cap may read, “18.00%.” This means that during the duration of your loan, your interest rate will never rise above 18.00%. APR caps provide borrowers with protection.
Autopay Discount
An autopay discount is a discount on your student loan interest rate for opting into automatic payments.
Award Year
An award year is the school year in which financial aid can be applied to fund your education. In most cases, the award year is July 1st to July 30th of the following year.
Borrower
A borrower is an individual who has taken out some type of loan (i.e. private student loan, federal student loan, etc.).
Borrower Benefits
Borrower benefits are cash “give-aways” sponsored by lenders. Scholarships, referral awards, or cash-back upon graduation are all types of borrower benefits. The terms of eligibility for the benefit are set by the lender.
Collection Agency
A collection agency is a company used by student lenders to collect debt that is in default or past due.
Collection Costs
Collection costs are fees incurred when your debt is recovered by a collection agency.
College Application
A process by which prospective students apply for acceptance at a college or university.
Consolidation
In terms of student loans, consolidation is the process of combining multiple student loans into one. This can be done through either a federal Direct Consolidation Loan or a private student loan refinance.
Cosigner
A cosigner is someone who agrees to sign a loan alongside the borrower, taking legal responsibility for paying back the loan if the borrower does not. A cosigner is often a family member or friend but can be anyone who is willing to cosign.
Cosigner Release
A cosigner release allows a cosigner to be removed from a loan after you prove you’re capable of making payments on your own. Lenders specify their own criteria of how you qualify for a cosigner release. If a cosigner is released from your loan, the loan will be removed from the cosigner’s credit report.
Cost of Attendance
The cost of attendance is the total amount it will cost to attend a school.
Credit Bureau
Companies that collect credit ratings on individuals from various creditors and make that information available to financial institutions. The three main credit bureaus are Experian, Equifax, and TransUnion.
Credit Check
A financial institution or company may examine a person’s credit history and financial behavior through a process called a credit check. The purpose of the credit check, in terms of student loans, is to determine an applicant’s eligibility for private loans as well as the interest rates they qualify for.
There are two types of credit checks: hard and soft. A soft credit check doesn’t affect your credit score. A hard credit check does affect your credit score. Soft credit checks occur when a borrower checks their rates with a lender. Hard credit checks occur after a borrower has seen their pre-approved rates and submits a formal application for approval.
Credit History
A record of an individual’s credit usage, activity, and bill payments. Credit history is used to indicate whether or not someone can responsibly make payments on their debt.
Credit Report
Credit bureaus prepare credit reports which contain a detailed description of a person’s credit history. This information is used by lenders to determine an individual’s overall creditworthiness.
Credit Score
A credit score is a number between 300 and 850 that represents an individual’s credit worthiness. Credit worthiness is used to describe the willingness of a lender to trust you to pay back your debts. The higher your credit score, the more a lender will consider you able and responsible enough to repay them back.
Creditworthiness
Creditworthiness is a lender’s ability to trust you to pay back your debt. A borrower deemed creditworthy is one that lenders deem able and responsible enough to may loan payments until the debt is paid off.
CSS Profile
When applying to college or university, you will likely utilize the College Board website. A CSS profile is an account with the College Board that includes all of your student information, family finance information, and more. This profile can help you qualify for institutional aid (aid that comes directly from the school you want to attend).
Debt Consolidation
Debt consolidation is the process of combining some or all of your student loans into one new loan. You can consolidate federal student loans through a Direct Consolidation loan or through student loan refinancing. You can consolidate private student loans through student loan refinancing.
Debt-to-Income Ratio (DTI)
An idea of how much monthly income goes towards debt. The DTI is typically calculated by adding up the monthly debt payments and dividing by the total pre-tax monthly income (gross).
Default
Default occurs on a student loan when payments are missed for 270 days (around 9 months). There are consequences associated with default such as the entire unpaid loan balance being due immediately, the default being reported to credit bureaus which can damage your credit score, and the lender pursuing legal action against you.
Deferment
When loan payments are postponed. Borrowers must apply for federal loan deferment, and it typically can only last for up to 3 years. If eligible for a deferment, the borrower may also not be responsible for paying the interest that accrues in the meantime while they are not making payments.
Delinquency
If a single student loan payment is missed, student loan delinquency occurs. The status will remain until the past-due balance is paid completely including any late fees.
Dependency Override
A process by which a dependent student can request to be classified as an independent student for financial aid purposes, given certain circumstances such as, but not limited to:
An abusive family environment (ie. sexual, mental, or physical abuse)
Incarceration or institutionalization of both parents
Abandonment by parent(s)
Parents lacking the mental or physical capacity to raise the child
Parents location is unknown and they cannot be located
Parents are hospitalized for an extended period
An unsuitable household (ie. child is removed from the household and placed in foster care)
A married student’s spouse dies
A married student gets divorced
Dependent
Dependent students are those that rely on a parent or guardian for financial support.
Direct Consolidation Loan
A Direct Consolidation Loan is a federal loan consolidation option that combines multiple federal loans into one big loan and payment. These loans have fixed interest rates determined by averaging the interest rates on the loans being consolidated, rounded up to the nearest ⅛ of one percent.
Direct PLUS Loan
Direct PLUS Loans are broken into two categories: Grad PLUS Loans and Parent PLUS loans. A Direct PLUS Loan is commonly referred to as a Grad PLUS loan when made to a graduate student or Parent PLUS loans when made to a graduate student’s parent.
Disbursement/Disbursed
Disbursement occurs when student loan funds are sent to your school.
Disclosure
A disclosure is intended to reveal information about terms, lenders, rates, and more. A disclosure may inform prospective borrowers about how rates are calculated for a specific lender they are looking into.
Discounts
A discount is a benefit that lenders provide you to lower your monthly payment. Lenders provide discounts to encourage good borrowing behavior.
For example, some lenders offer a discount (0.25%) if you turn on ACH automatic payment. For you, this discount is great because it results in loan savings. For a lender, an automatic payment provides them with a greater guarantee that they’re going to get their payment on-time.
Discretionary Forbearance
Forbearance can also be referred to as a general forbearance or a discretionary forbearance.
Discretionary Income
In general, discretionary income is the amount of money you have left after taxes and necessary expenses.
When used to describe income-based repayment plans, the PAYE plan, and loan rehabilitation, discretionary income refers to the difference between your annual income and 150% of the poverty guideline for your family size and state of residence.
When used to describe income-contingent repayment plans, discretionary income refers to the difference between your annual income and 100% of the poverty guideline for your family size and state of residence.
Early Action
Early action allows you to apply well before a school’s normal application deadline, thus receiving a decision earlier than the traditional response date. Applying early action is not binding.
Early Decision
Early decision allows you to apply well before a school’s normal application deadline, thus receiving a decision earlier than the traditional response date. Applying early decision is binding. This means that if you apply early decision and are accepted, you are agreeing to commit to that school.
Educational Expenses
Educational expenses are school-related expenses such as tuition, enrollment fees, room and board, meal plans, etc.
Eligible Program
In terms of federal aid, an eligible program is one with organized instruction that meets the length requirements necessary to lead to an academic, professional, or vocational degree or certificate.
Eligible Noncitizen
You are considered an eligible noncitizen if you fall into one of the following categories:
You’re a U.S. National or lawful permanent resident with a green card.
You’re a conditional permanent resident.
You have an Arrival-Departure Record from the U.S. Citizenship and Immigration Services, showing one of the following statuses:
Refugee
Asylum-granted
Parolee
Conditional entrant
Cuban-Haitian Entrant
You hold a T-nonimmigrant status or your parent holds a T-1 nonimmigrant status.
You are a “battered immigrant-qualified alien” who is a victim of abuse by your citizen or lawful permanent resident spouse or parents, or you are the child of a person designated under the Violence Against Women Act.
You are a citizen of the Republic of Palau, the Republic of the Marshall Islands, or the Federated States of Micronesia.
Eligibility
Eligibility refers to the requirements that a borrower must meet to be approved for a loan from a private lender. If the borrower meets the requirements, they may be eligible.
FICO score is an example of an eligibility requirement. Most lenders require that borrowers have above a certain FICO score to be eligible for a loan.
Emancipated Minor
An emancipated minor is someone who has been legally deemed an adult by the court of their state. Emancipated minors are considered independent students for student loan purposes.
Employment History
An employment history is a record of an individual’s past and current employment. Some private student lenders use employment history to determine eligibility for a loan.
Endorser
An endorser, sometimes required for federal PLUS loans, is someone who signs onto the loan alongside the borrower, agreeing to pay it back if the borrower fails to do so.
Enrollment Status
Enrollment status, often reported by the school you attend, indicates whether you are (or were) full-time, three quarter-time, half-time, less than half-time, withdrawn, graduated, etc.
Entrance Counseling
A federal program designed to ensure that borrowers understand the responsibility that comes with borrowing a student loan. The online program teaches borrowers what a loan is, how interest works, what the repayment options are, and how to avoid delinquency and default. Entrance counseling must be completed before loan money can be disbursed.
Exit Counseling
A federal program designed to ensure that borrowers understand their loan repayment obligations and are prepared for repayment. Exit counseling must be completed upon leaving school or dropping below half-time.
Extended Repayment Plan
An extended repayment plan includes a repayment term of up to 25 years. This can lower your monthly payments substantially, however, you will pay more in interest over time than you would with a shorter repayment plan such as a 10-year plan.
FAFSA
FAFSA stands for Free Application for Federal Student Aid. It is a form that the federal government and colleges use to determine how much aid a prospective college student is eligible for.
Federal Financial Aid
Federal financial aid is provided to you after completion and submission of your FAFSA. This aid can include grants and scholarships, work-study programs, and loans.
Federal Student Loans
The U.S. Department of Education is the government body overseeing all federal student loans. Federal student loan eligibility is determined by your FAFSA.
Federal Student Loans
Federal student loans are those issues by the U.S. Department of Education. These loans are granted after a prospective or current student fills out the FAFSA.
Federal Student Loan Repayment Plans
Federal student loans have 4 main repayment options:
Standard Repayment
Graduated Repayment
Extended Repayment
Income-Driven Repayment (IDR)
Federal Student Loan Servicer
A loan servicer is a company assigned to handle the billing on federal student loans on behalf of the federal government. There are 9 servicers that are most commonly used:
Nelnet
Great Lakes Educational Loan Services, Inc.
Navient
FedLoan Servicing
MOHELA
HESC/EdFinancial
CornerStone
Granite State
OSLA Servicing
Financial Aid Award Letter
A financial aid award letter provides details on the monetary assistance a prospective student can receive, specifically in the form of federal aid. This letter comes from each specific institution that the student has applied to.
Financial Need
In general, financial need is the difference between the cost of attendance and your ability to pay. For federal aid, financial need is calculated by subtracting your Expected Family Contribution (EFC) from the overall cost of attendance (COA).
Fixed Rate
An interest rate that does not change over the life-time of your loan. Fixed rates remain the same for the entire length of a loan.
Forbearance
Forbearance allows borrowers to postpone student loan payments, however, it differs from deferment as the borrower is still responsible for paying the interest that accrues in the meantime. Borrowers can pay the interest as it accrues or allow it to be capitalized and added to the loan balance overall.
FSA ID
A username and password combination used to log in to U.S. Department of Education systems online.
Grad PLUS Loans
Grad PLUS Loans is a type of federal student loan for graduate or professional students.
Graduate Student Loans
Both federal and private student loans have options for graduate students. Federal loans for graduate students include Direct Unsubsidized Loans and Direct PLUS Loans. Eligibility for federal student loans is needs based. Eligibility for private student loans is credit based.
Graduated Repayment Plan
A graduated repayment plan starts your loan payments off at a lower amount and slowly increases them every 2 years. A graduated repayment plan will still land you with your loans completely paid off after 10 years, but you will pay more in interest over time in comparison to a Standard Repayment Plan.
Grant
Financial aid that doesn’t need to be repaid. Federal grants are given out based on financial need and a list of other requirements. State and school based grants are available as well, but vary by state and institution.
When you are enrolled in half of the expected course load, often 6 credit hours per semester.
Income
The amount of money you make per year. Household income includes the amount married couples make together.
Income-Based Repayment Plan
IBR is an option for federal student loan borrowers who took out loans after July 1, 2014. It sets monthly payments at 10% of the discretionary income with a repayment term of 20 years.
Income-Contingent Repayment Plan
ICR sets payments at the lesser of either:
20% of discretionary income OR
Whatever your fixed payment would be with a 12 year repayment period
Income-Driven Repayment Plan
Income-driven repayment options depend on your income and family size. This can reduce your monthly payment significantly if your income is low.
Independent Student
When used in terms of federal student aid, an independent student is someone who is at least one of the following:
Born prior to January 1, 1999
Married
A graduate or professional student
A veteran
A member of the armed forces
An orphan
A ward of the court (an individual who is deemed by the courts to be unable to manage their own affairs and has been placed under the legal control or protection of a guardian by the courts)
An individual with legal dependents other than a spouse
An emancipated minor
An individual who is homeless or at risk of becoming homeless
Interest
Interest is the amount of money a lender charges you for borrowing a loan. It is the “extra” money you pay the lender for the opportunity to use their funds.
Interest is typically expressed as an annual percentage rate (APR). You may see a lender differentiate between interest rate and APR. There is a subtle difference. APR is the annual cost of a loan to a borrower, including fees. Interest rate is the annual cost of a loan to a borrower, excluding fees.
Interest-Only Payment Plan
Under this payment plan, you’ll only pay the interest that accrues while you’re in school. After graduation, you’ll make full monthly payments. This plan saves you money in interest over time.
Interest Rate
Federal and private student loan interest rates are calculated differently.
Federal loan interest rates are set by Congress each year. Private lenders set their interest rates based on a variety of factors, typically including the creditworthiness of the borrower.
Iraq and Afghanistan Service Grant (IASG)
Iraq and Afghanistan Service Grant is a federal grant that provides money to students whose parent(s) or guardian(s) died as a result of military service in Iraq or Afghanistan.
Legal Guardianship
A court designation that authorizes an individual to care for someone in place of parents. If you have a legal guardian, you qualify as an independent for federal aid purposes, meaning you do not need to report your parents’ income on the FAFSA.
Lender
The organization or company you borrow money from.
Loan
Money given to an individual in exchange for repayment of the money, usually with interest.
Loan Discharge
Removal of the obligation to repay a loan, often granted for extenuating circumstances.
Loan Forgiveness
Removal of the obligation to repay a loan, often granted after working in a particular industry.
Loan Limits
The minimum and maximum student loan debt that private lenders are willing to refinance.
Loan Originator
Someone who takes a prospective student loan borrower’s application, reviews it, handles the approval process, provides the loan agreement, and disburses the funds. Lenders work with third-party loan origination services to provide borrowers digital lending experiences.
Loan Principal
Principal, also known as the principal balance, is the amount still owed on a student loan or refinance loan.
Loan Rehabilitation
The process by which a borrower can bring their student loan out of default by abiding by certain repayment requirements.
Loan Servicer
The company who handles loan collection, customer service, and loan maintenance.
Master Promissory Note
The Master Promissory Note (MPN) is a legal document in which borrowers agree to repay their federal student loans, including any interest that accrues, to the U.S. Department of Education.
Merit-Based
Merit-based aid is aid that does not factor in a student’s financial need. Rather, it is based on factors such as academic performance, extracurricular achievements, etc.
Monthly Payment After Graduation
After graduation, you’ll be expected to begin making full monthly payments on your student loans. The size of these monthly payments depends on your loan term, APR and principal balance. Some lenders provide a six month “grace period” before full payments begin. During the “grace period” payments aren’t due but interest accrues.
For loans with a fixed interest rate, monthly payments after graduation are set ahead of time. For loans with a variable interest, monthly payments after graduation are estimates, as the interest rate may increase or decrease during the duration of your loan.
Monthly Payment During School
During school, you may be expected to make payments on your student loans. The size of these monthly payments depends on your payment plan. If you don’t make monthly payments during school, your loan balance will rise. There are three popular types of in-school monthly payments.
You may only pay the monthly interest on your loan while you’re in school. This plan is called “Interest Only.” You may pay a fixed amount while you’re in school that only covers part of the monthly interest that you owe. This plan is called “Partial Interest.” You may pay full monthly payments while you’re in school. This plan is called “Immediate.”
Origination Fee
Fee charged by a lender to cover the cost of processing the loan. The fee is usually expressed as a percentage of the loan size. You will not have to explicitly pay the lender the origination fee. The fee is deducted from the amount of money the lender disburses to you.
For example, if a loan has a 1.00% origination fee and you’re looking to borrow $10,000, your origination fee will be $100. Assuming no other expenses, you’ll receive $9,900 ($100 deducted for the origination fee) but have to pay back the full $10,000.
Out-of-State Student
A student who is attending school outside of their state of legal residence.
Parent PLUS Loan
Student loans offered by the federal government to parents who want to borrow money for their child’s education.
Parent PLUS Loan Refinancing
Borrowing a private loan at a lower interest rate to cover the cost of your current Parent PLUS debt. The new loan, with a lower interest rate, allows you to save money.
Payment Plan
A payment plan is a way to pay back a loan over an extended period of time. For private student loans, there are four common payment plans: Deferred, Immediate, Interest Only, Partial Interest.
Deferred payment: You’ll pay nothing during school but your loan balance grows.
Immediate: You’ll make full monthly payments while in school.
Interest Only: You’ll only pay the interest on your loan while you’re in school.
Partial Interest: You’ll make a fixed monthly payment while you’re in school that only covers part of the interest that you owe.
As a guiding rule, the more you pay toward your loan today, the less you’ll pay in the future.
Pay As You Earn (PAYE)
A repayment plan in which your monthly student loan payments are reduced to 10% of your discretionary income and never more than your payment on a standard 10-year repayment plan.
Prepayment Penalty
Prepayment refers to paying off your full student loan balance earlier than scheduled. Some private lenders have a prepayment penalty, a fee charged for paying off debt faster than agreed upon. Note that student loan lenders are not allowed to charge a prepayment penalty.
Prequalification
The process a lender takes to determine if a borrower is eligible for a loan. If the borrower is eligible, the prequalification process will determine at what rates the borrower qualifies. Prequalification requires a soft credit check which does not impact a borrower’s credit score.
Principal
The amount you initially borrow and agree to pay back.
Private Student Lender
Banks, credit unions, or other financial institutions that lend money to students.
Private Student Loans
Loan funded by private lenders. Private student loans typically require a soft credit check to determine eligibility, as where federal loans do not.
Public Service Loan Forgiveness
A loan forgiveness program designed for people who pursue a career with the federal, state, local, or tribal government or for an eligible not-for-profit organization. Those who qualify and are accepted will receive forgiveness for their entire remaining balance after they’ve made 120 qualifying monthly payments on their loan.
Refinancing Student Loans
Refinancing is a process in which you take out a new private loan at a lower interest rate to replace all of your other loans. This typically also comes with a more favorable repayment term.
Repayment Term
A repayment term is the length of time a borrower has to repay their debt in full.
Revised Pay As You Earn (REPAYE)
Under REPAYE, the term of a borrower’s loan is extended. This typically means extending to a 20 year repayment term for undergraduate loans and a 25 year repayment term for graduate loans. Under REPAYE, the monthly payment is also usually capped at 10% of the discretionary income.
Satisfactory Academic Progress (SAP)
Successful completion of the coursework necessary to progress toward an eligible certificate or degree.
Scholarship
A type of financial aid that you don’t have to pay back. These can be based on merit, financial need, or a combination of both.
Spouse Loan Consolidation
A process that involves combining all of you and your spouse’s loans together into one new loan instead of keeping separate loan accounts. PenFed Credit Union is the only lender that offers this option of Spouse Loan Consolidation.
Standard Repayment Plan
Standard Repayment Plans are the default repayment plan for federal student loans that require a fixed monthly payment with the goal of paying off the loan in full in 10 years.
Student Loan Consolidation
Consolidation involves combining multiple student loans into one loan, typically through a Direct Consolidation Loan or a student loan refinance.
Student Loan Grace Period
When you initially take out a loan, you typically don’t have to start making payments on it immediately. Oftentimes, payments will be automatically deferred until 6 months after graduation, however, this grace period varies depending on the loan you have and your specific lender.
Student Loan Interest Tax Deduction
A tax deduction for student loan borrowers that allows them to deduct all or some of the amount they paid in interest on their student debt from their income.
Subsidized Student Loan
Direct Subsidized Loans are federal student loans available to students with financial need. There is no credit check for these loans, and interest does not accrue while you are in school and for the first 6 months after you leave school.
Total and Permanent Disability (TPD) Discharge
A form of student loan forgiveness given to borrowers who are unable to repay their debt due to a permanent mental or physical disability.
Total Interest Expense
Total interest expense is the amount of interest that accrues across the entirety of a borrowing period. It is the total cost of borrowing a loan, excluding one-time fees (i.e. origination fee).
For a fixed rate loan, total interest expense is set to a specific monetary amount (assuming the borrower makes minimum monthly payments on-time during their payback period). For a variable rate loan, total interest expense is an estimate. Because the interest rate of a variable rate loan either increases or decreases over time, it’s impossible to know exactly how much interest will accrue over a borrowing period.
Tuition
Fees associated with learning at a college or university.
Type of Interest Rate
There are two types of interest rates for student loans: fixed and variable. A fixed rate loan has the same interest rate for the entirety of the borrowing period, while variable rate loans have an interest rate that changes over time.
Borrowers who prefer predictable payments generally like fixed rate loans, which won’t change in cost. The price of a variable rate loan will either increase or decrease over time, so borrowers who believe interest rates will decline tend to choose variable rate loans.
In general, variable rate loans have lower interest rates and can be used for affordable short term financing.
Undergraduate Student
A student pursuing a degree at their first level of higher education. In other words, a student at a college or university who has not yet earned a degree.
Unsecured Loan
Unsecured loans are those that don’t require any form of collateral. These loans tend to have higher interest rates as they are riskier to the lender. Student loans are a type of unsecured loan.
Unsubsidized Student Loan
Direct Unsubsidized Loans are sponsored by the Department of Education and available to both undergraduate and graduate students. These loans are not needs based. There is no credit check requirement for these loans, however, the government does not cover the interest for you at any point. Interest starts accruing immediately after the loan is originated.
Untaxed Income
Income excluded from taxation by the Internal Revenue Service (IRS).
U.S. Department of Education
A Presidential cabinet-level department of the U.S. government that is administered by the U.S. Secretary of Education. The budget of this department supports the grants, loans, and work-study programs provided to students and families to pay for college education.
Variable Rate
Variable rates are interest rates that fluctuate over the life of a loan. The rate typically changes on a monthly, quarterly, or annual basis.
Work-Study Programs
Work-study programs are provided to students with financial need based on their FAFSA. The programs provide job opportunities to these students that are typically part-time and flexible, specifically designed to be easier to manage alongside a college education.
For the 2021-2022 academic year, the average interest rate for federal student loans was 3.73% for undergraduates, 5.28% for graduate students, and 6.28% for parents and graduate students taking out PLUS loans. While it’s challenging to determine the average for private student loans simply due to how much the interest rates vary, they tend to be even higher.
Finding ways to lower your student loan interest rate could lower your overall monthly payment and save you money over time. Here’s how to lower your student loan interest rate for both federal and private student loans.
Can I Get a Lower Interest Rate on My Federal Loans?
Interest rates on federal student loans are set by Congress each year and are technically considered law. Unfortunately, this means that borrowers of federal student loans can’t negotiate their way into a better interest rate.
However, you may be able to get a small reduction on your interest rate by opting into automatic payments. If you agree to make payments on your loan through autopay, a system that automatically takes the monthly payment amount straight from your bank account, you may be able to secure around a 0.25 to 0.50 percentage point reduction in your interest rate.
If you’re confident this method wouldn’t send you into a spiral of overdraft fees, it may be a good option to enroll in auto-debit payments to save you a bit of interest.
Note: Be sure to check with your federal loan servicer to see if they offer interest rate discounts for setting up autopay.
Can I Get a Lower Interest Rate on My Private Loans?
Interest rates on private loans are set by the lender themselves and based on a variety of factors such as your credit score and income. This means that the rates are not set in stone as with federal student loans. Private lenders may be open to negotiation or reevaluating your interest rate.
Proactive Steps to Lower Your Private Loan Interest Rate
If you’re thinking about taking out a private student loan, there are a few things you should do beforehand that will help you secure a lower interest rate when you apply:
Take a Look at Your Credit Score
Interest rates are calculated based on a variety of factors, one of which being your credit score. Ensuring you have a solid credit score before applying for a private loan will help you get a lower interest rate.
Although each lender is different, in general, private lenders look for credit scores around 660 or above. While you can still get a private loan with a bad credit score, your interest rates will be higher. If your credit score isn’t great, don’t worry. There are things you can do to raise it.
Find Someone Willing to Cosign
A cosigner is someone who signs onto the loan alongside the borrower, agreeing to pay back the loan if the borrower doesn’t. Having a cosigner with a good credit score can help you secure a lower interest rate on your private loan because lenders will assume less risk. Given that most young people have a limited credit history, cosigners are very common for private student loans. In fact, around 90% of undergraduate students use a cosigner for their student loans.
The only “risk” to having someone cosign is that they are technically equally responsible for the loan, meaning that if you fail to make payments on the loan, it could hurt their credit score.
Compare Interest Rates Carefully
As always, before jumping into any private loan, it’s important to compare multiple private lenders to find the lowest rate. Complete Sparrow’s application to compare real rates from more than 10 different lenders to make sure you’re getting the best rate possible.
Lowering Your Interest Rate If You Already Have a Loan
If you already have a private student loan, you can lower your interest rate by:
Opting Into Automatic Payments
As with federal loans, many private lenders also offer a discount for opting into an autopay system. While the rate may only drop by 0.25 to 0.5 percent, every bit makes a difference.
Even if you only saved $10 a month from this decrease in interest, that would be $1,200 over the course of a 10-year repayment.
Refinancing Your Student Loans
If you have a stable income and plan to pay off your student debt quickly, you should consider refinancing for a lower interest rate.
Refinancing your loan is the process of taking out a new loan with a lower interest rate to pay off the loan you currently have. By doing this, you can reduce your payments and save on interest.
Borrowers can also choose to consolidate their federal student loans through a Direct Consolidation Loan. The new interest rate will be the average of the rates on the loans you are consolidating. However, you’ll want to consider some of the benefits associated with federal student loans that you’d be giving up, such as income-driven repayment, the possibility of loan forgiveness, and other federal borrower protections.
Negotiate with the Lender
This method won’t guarantee you any savings in interest, but it’s always worth a shot. Look around online for private lenders offering competitive interest rates and present it to the lender you’re already working with. The lender might be willing to make alterations to the rate you previously agreed upon in an effort to keep you as a customer.
Final Thoughts from the Nest
Finding a way to lower your student loan interest rate is one of the best ways to save yourself money in the long run. While not all methods will work for everyone, it’s likely that if you’re trying different approaches, you’ll find at least one that will work.
The term “refinancing” is one we hear a lot in the realm of student loan repayment, but how many of us know what it actually means?
Refinancing is actually surprisingly easy to understand: a lender will pay off your existing loans and give you a new one with a lower interest rate or shorter repayment plan. It’s basically a chance to swap your current loan for a better one, with better terms.
In the long run, the goal of refinancing is to help save you money. And the best part is, you are allowed to refinance as many times as you like, free of cost. Most lenders allow you to refinance both your federal and private student loans.
Let’s say you took out a student loan of $50,000 at an interest rate of 5% during undergrad and you plan on paying it off over the next 10 years at a monthly rate of around $530. By the time you finish paying it off, you will have actually paid $63,640 — the original $50,000 plus $13,640 in interest.
On the other hand, if you refinance at an interest rate of 2.5% over the same ten-year period, you can reduce your monthly payments to $471, and pay only $6,562 in interest, saving $7,078 over the lifetime of the loan.
Most lenders require you to have a good credit score (in the mid 600s). Lenders also want proof of a stable income and cash flow to support your new loan.
If your credit score has improved since taking out your original student loan, you may be well-positioned to refinance.
If your credit score is poor, you may struggle to find a lender willing to help you refinance because you will be viewed as a higher risk. If this sounds like you, consider adding a creditworthy cosigner to your application to increase your changes of qualifying for a lower rate.
Change in interest rate and loan term
Before you refinance your student loans, consider the change in interest rate and loan term. A lower interest rate means you will pay less interest each month, resulting in a lower total payment.
The loan term dictates how long you will be paying back the loan. A shorter term typically means a higher monthly payment, but allows you to get out of debt faster. On the other hand, a longer term usually means a lower monthly payment, but increases the amount of interest that you have to pay throughout the lifetime of the loan.
Type of loans
When you refinance, you are essentially applying for a private loan. If you already have private loans, refinancing is a great way to decrease the amount of interest you pay on your loans.
If you have federal loans, however, you’ll want to weigh the reduction of your interest rate with the loss of federal student benefits that you’ll miss out on when you refinance with a private lender, such as:
Income-driven repayment plans
Income-driven repayment plans readjust the amount you pay as your income falls. This keeps your repayment from ever totaling more than 10% of your monthly income, and it can help you stay financially secure.
Loan forgiveness
Federal student loans have some loan forgiveness options, such as the Public Service Loan Forgiveness and Teacher Loan Forgiveness. When you refinance a federal student loan, you lose access to all these long forgiveness programs.
Deferment and Forbearance
Federal student loans include deferment and forbearance which allow you to postpone your loan payments if you suffer severe financial hardship. But if you refinance, you’ll likely lose these protections.
Am I Eligible to Refinance My Student Loan?
While everyone’s situation is different, here are some of the qualities that will make you well-positioned to refinance your student loans.
You’ve graduated or are no longer in school.
You have a high-interest private or federal student loan
You earn a steady flow of income
You’ve kept up with your loan payments and have a credit score in the mid/high 600s or above.
You do not work for the government, and you do not foresee the need for an income-driven payment plan.
If this describes you, then you are in good shape to refinance your student loans, and will likely save a substantial amount by doing so. If you answered yes to some of these and not others, you should consider refinancing only your private student loans.
Situations Where it Makes Sense to Refinance
Here are some situations where it would make sense:
You have a private student loan with a high interest rate
If you’ve got a private student loan with a high interest rate, you should try refinancing as soon as possible. That will maximize your potential savings.
If you can lower your interest rate (even by just a half of a percentage point), it could save you thousands of dollars throughout the lifetime of the loan. If you previously refinanced your loans, you can refinance again to lock down an even lower rate. Since refinancing is free, you are almost guaranteed to save money.
Want to compare all your student loan refinancing options? Complete the free Sparrow application to compare personalized rates from over 15 premier lenders.
Your finances improve
Credit score and income are the two main factors that determine the interest rate on your private student loans. If your credit score increases or you get a pay raise, it could be a great time to shoot your shot at refinancing your student loans. Refinancing to a shorter repayment plan at a lower interest rate will allow you to pay off your loans faster and save money in the long term.
In order to refinance, you generally need a credit score at least in the high 600s and enough income to consistently pay your debts and other expenses. If you don’t meet those criteria, you could refinance with a cosigner who does.
You have a federal student loan but don’t plan on using of the federal protections
If you don’t plan on taking advantage of federal loan benefits, such as income-driven repayment and Public Service Loan Forgiveness, refinancing might be a good option for you. Only refinance your federal student loans if you know you can get a lower rate. There is no reason to refinance your loans unless you end up paying less in interest.
You have a creditworthy cosigner
A cosigner is a person – such as a parent, close family member or friend – who pledges to pay back the loan if you do not. If you can find a cosigner with strong credit and high income, you’ll have a better chance of qualifying for a low interest rate. This could end up saving you thousands of dollars of interest expense over the lifetime of your loan.
How to Prepare For Refinancing
1.Explore all private loan options.
Determine if the private loan being considered will have a fixed or variable interest rate. A fixed interest rate remains the same throughout the lifetime of the loan, while variable rates will likely fluctuate throughout the lifetime of the loan depending on interest rates set by the banks.
Although a variable rate may be lower at certain points throughout the loan, they are largely unpredictable. On the other hand, fixed-rate offers more stability since you’ll know exactly how much you owe each month. Both can be good options depending on your circumstance and the movement of variable rates.
2. Know where you stand.
A strong credit score will almost certainly be required. While most lenders want to see scores in the mid-to-high 600s, aiming for 700 or higher will help with both the approval process and the rate you will qualify for. This means you will need to know where they stand before starting the process.
3. Carefully examine your credit report and score.
There are a number of sites that allow you to check your credit report for free. If there are mistakes, you will need to take the time to correct them before you start the process of applying for refinancing. If your score is not where it needs to be, you will need to take steps to improve your score before starting on the path to refinancing.
4.Shop around for the best rates.
Some borrowers may be concerned about damaging their credit score by having too many hard inquiries over a short period of time. Luckily, we’ve built a free tool that allows you to see what rates you’ll qualify for without impacting your credit score.
It is no secret that the cost of education has increased dramatically over the last several decades. At the current rate, the cost of college doubles every nine years. The rapid increase in the cost of education has forced generations of Americans to rely on student loans to afford a degree. Unsurprisingly, almost 70% of students in the Class of 2019 took out student loans.
Since borrowing affects most students in the US, it is important to know how the student lending industry operates. In this article, we’ll break down everything you need to know about student loans.
What is a Student Loan?
A student loan is money borrowed from the government or a private lender, designated for educational purposes. Typically, these loans cover the cost of tuition, books, supplies, and room-and-board.
While it is best to avoid debt, many financial professionals classify student loans as “good debt.” That’s because a college education is seen as an investment in yourself that helps increase your lifetime earning potential. In other words, the career earnings unlocked by a college degree are worth more than the loan. On average, college graduates earn more money and have better job security across their professional careers than those with only a high school diploma.
Federal student loans are provided by the U.S. Department of Education, while private student loans and student loan refinancing are supported by banks, credit unions, non-profits, and other private lenders.
Of the three types of debt, federal loans usually have the lowest interest rates and most flexible repayment options. With that said, the particular loan that is best for you depends on your financial need, year in school, and credit history.
Federal Student Loans
After you’ve exhausted grants, work-study, and scholarships, you should turn to federal student loans to pay for college.
To apply for federal student loans, you must fill out the Free Application for Federal Student Aid (FAFSA). The FAFSA is the go-to form that determines your eligibility for federal financial aid.
To receive federal support, you must be a U.S. citizen, have a valid social security number, have earned a high school diploma, and be enrolled at an eligible college or university.
The FAFSA is available starting Oct. 1 the year before a you plans to enroll. For example, if you are enrolling for the 2022-23 school year, the FAFSA will be available on Oct. 1, 2021.
The FAFSA is accepted, reviewed, and distributed on a rolling basis. You should complete the FAFSA form as early as possible. The earlier you apply, the better your chances are for receiving financial aid awards.
Benefits of Federal Student Loans
Federal student loans come with many benefits and protections that are not typically offered with private student loans. Designed to reduce the burden of repayment, these advantages include:
Federal student loans typically have lower interest rates than private loans. Rates for new federal loans are also fixed, meaning they’ll stay constant during the entire loan term.
2. No credit check
Unlike private student loans, most federal loans do not require you to have credit history. The only type of federal loan that requires a credit check is Direct PLUS, which is available to graduate students and parents. This makes federal student loans the best option if you have a limited credit history.
3. No cosigner requirement
Federal student loans do not require cosigners. This means you do not need to rely on a relative for financial help, making the process much easier for those legally and financially independent.
There is one exception: if you are a graduate student or parent applying for a Direct PLUS loan and have a poor credit history, you may not be eligible without an “endorser,” which is similar to a cosigner.
4. Forbearance and deferment options
Federal student loans offer forbearance and deferment options if you face economic hardship. Forbearance and deferment allow you to postpone your student loan payments for up to three years.
5. Income-driven repayment
Federal student loans offer a repayment plan that is based on your income. With income-driven repayment, you pay a percentage of your income each month — or $0 if you have no income.
6. Loan forgiveness
The Public Service Loan Forgiveness program allows you to have loans forgiven after at least 10 years of public service and 120 qualifying monthly payments.
Loan forgiveness is also available after you have made qualifying monthly payments in an income-driven repayment plan for 20 to 25 years.
We’ll break down what you need to know about each of the loans below.
Direct Subsidized Loans
Who can get Direct Subsidized loans?
In order to qualify for Direct Subsidized loans, you must be an eligible undergraduate student who demonstrates financial need.
How much can you borrow?
Your school determines the amount you can borrow. The amount you borrow may not exceed your financial need.
If you are an undergraduate student, the maximum amount you can borrow with a Direct Subsidized loan ranges from $5,500 to $12,500 per year depending on your year in school and your dependency status (whether you are a dependent or independent student). The maximum amount you can borrow per year increases every year you are in school.
What’s the interest rate on Direct Subsidized loans?
The interest rate for Direct Subsidized loans is 3.73% for 2021-22.
Is there an origination fee?
When you take out a Direct Subsidized loan, you will be charged an origination fee — a fee meant to offset a lender’s cost for issuing a loan. The origination fee is deducted from the loan disbursement before you or the school receives the funds. Currently, the origination fee on Direct Subsidized loans is 1.057%, but it changes each year on October 1st.
So for example, if you borrow $12,500 in Direct Subsidized loan, 1.057% (or $132) will go to the federal government, while the remaining $12,368 will go to your school (and then you).
Who will pay the interest?
The U.S. Department of Education pays the interest on a Direct Subsidized loan:
while you’re in school at least half-time,
for the first six months after you leave school (referred to as a grace period), and
during a period of deferment (a postponement of loan payments).
Thoughts from the Sparrow Nest
The low interest rate and generous grace period make Direct Subsidized loans the preferred option if you need to borrow money for school. But remember, Direct Subsidized loans are only available to undergraduates who can demonstrate financial need, and the amount of money you can borrow with Direct Subsidized loans is capped at $12,500. This means that, even if you do qualify for Direct Subsidized loans, you might need to look elsewhere to fund the gap in your education financing.
Direct Unsubsidized Loans
Who can get Direct Unsubsidized loans?
Direct Unsubsidized loans are based on merit, not financial need. They are made eligible to undergraduate, graduate, as well as professional students.
How much can you borrow?
Your school determines the amount you can borrow based on your cost of attendance and other financial aid you receive.
The maximum amount you can borrow each academic year in Direct Unsubsidized loans ranges from $5,500 to $12,500 for undergraduates, depending on your year in school and your dependency status. Direct Unsubsidized loans have an annual limit of $20,500 for graduate or professional students.
What’s the interest rate on Direct Unsubsidized loans?
The interest rate for Direct Unsubsidized loans is 5.28% for 2021-22.
Is there an origination fee?
Similar to Subsidized loans, when you take out a Direct Unsubsidized loan, you will be charged an origination fee — a fee meant to offset a lender’s cost for issuing a loan. The origination fee is deducted from the loan disbursement before you or the school receives the funds. Currently, the origination fee on Direct Unsubsidized loans is 1.057%, but it changes each year on October 1st.
So for example, if you borrow $20,000 in Direct Unsubsidized loan, 1.057% (or $211) will go to the federal government, while the remaining $19,789 will go to your school (and then you).
Who will pay the interest?
When you take out a Direct Unsubsidized loan, you have a 6 month grace period. Unlike with Direct Subsidized loans, however, you are responsible for all interest charges on unsubsidized loans, from the moment you take out the loan until the day you pay it off.
Thoughts from the Sparrow Nest
Direct Unsubsidized loans are a great choice for undergraduate who have exhausted their Direct Subsidized loans. They’re also the preferred option for graduate and professional degree students who need federal funding. That is because of the relatively low interest rate and higher borrowing limits.
With that said, if you meet the financial need requirements to qualify for subsidized loans, you’ll pay less over time than you would with unsubsidized loans. Unlike with Direct Subsidized loans, you are responsible for all interest charges on Unsubsidized loans, from the moment you take out the loan until the day you pay it off.
Direct Subsidized Loans vs Direct Unsubsidized Loans
Subsidized
Unsubsidized
Qualification
Need-based
Merit-based
Annual borrowing limit
$5,500 – $12,500, depending on your year in school and dependency status
$5,500 – $12,500, depending on your year in school and dependency status
Interest while in school
Government pays interest while you’re in school
Interest accrues while you’re in school that you must eventually pay
Eligible borrowers
Undergraduates only
Undergraduate and graduate or professional degree students
Direct PLUS Loans
What are the different types of Direct PLUS loans?
There are two types of Direct PLUS loans: Grad PLUS loans and Parent PLUS loans.
Grad PLUS loans allow graduate and professional students to borrow money to pay for their own education. You can use Grad PLUS loans to cover any costs not already covered by other financial aid or grants, up to the full cost of attendance.
Parent PLUS loans allow parents of dependent students to borrow money to cover any costs not already covered by the student’s financial aid package, up to the full cost of attendance. The program does not set a cumulative limit to how much parents may borrow. Parent PLUS loans are the financial responsibility of the parents, not the student.
Who can get Direct PLUS loans?
While most federal student loans are need or merit-based, Direct PLUS loans are based on a credit check. If you have a poor credit history, you will have a harder time qualifying and might require an “endorser” (essentially a cosigner, who pledges to pay back the loan if the primary borrower cannot). Even if you have an adverse credit history, you may still be able to receive a PLUS loan if you meet additional requirements.
How much can you borrow?
The maximum PLUS loan amount you can receive is the cost of attendance (determined by the school) minus any other financial aid received.
What’s the interest rate on Direct PLUS loans?
The interest rate for Direct PLUS loans is 6.28% for 2021-22.
Is there an origination fee?
Similar to Subsidized and Unsubsidized loans, when you take out a Direct PLUS Loan, you will be charged an origination fee — a fee meant to offset a lender’s cost for issuing a loan. The origination fee is deducted from the loan disbursement before you or the school receives the funds. Currently, the origination fee on Direct PLUS Loans is 4.228%, but it changes each year on October 1st.
So for example, if you borrow $12,500 in Direct PLUS Loan, 4.228% (or $528) will go to the federal government, while the remaining $11,971 will go to your school (and then you).
Who will pay the interest?
Direct PLUS loans are not subsidized, which means that interest accrues while you are enrolled in school. Direct PLUS loans also do not have a “grace period,” which means you must start repaying PLUS loans as soon as you or the school receives the loan funds.
Thoughts from the Sparrow Nest
Direct PLUS loans can be a good option for parents and grad students, alike.
If you’re a parent, you should take out PLUS loans if you need the safety net or want the benefits these loans offer, such as income-driven repayment plans and Public Service Loan Forgiveness.
If you’re a student, you should take out PLUS loans to pay for grad school only after you have maxed out the borrowing limit on lower-interest unsubsidized loans.
Federal Student Loan Interest Rates
Loan Type
Borrower Type
Interest Rate
Origination Fee
Direct Subsidized Loans & Direct Unsubsidized Loans
Undergraduates
3.73%
1.057%
Direct Unsubsidized Loans
Graduate or Professional Students
5.28%
1.057%
Direct PLUS Loans
Parents and Graduate or Professional Students
6.28%
4.228%
Note: The interest rates for Direct Subsidized Loans, Direct Unsubsidized Loans, and PLUS loans first disbursed on or after July 1, 2021 and before July 1, 2022. Rates and fees are subject to change.
Federal Student Loan Repayment Plans
Federal student loans offer several repayment options depending on the loan type. These options include:
Check out the information below for a complete breakdown of the different repayment options for federal student loans.
Standard Payment
The standard payment plan is available to all borrowers and is great if you want to pay off your debt in the shortest period of time. With a standard student loan payment option, you would make equal monthly payments for 10 years. You’ll pay less interest and pay off your loans faster than you would on other plans.
Eligible Borrowers
All borrowers are eligible for this plan.
Eligible Loans
Direct Subsidized and Unsubsidized Loans
Subsidized and Unsubsidized Federal Stafford Loans
All PLUS loans
All Consolidation Loans (Direct or FFELP)
Pros of Standard Repayment:
Shorter repayment period compares to other options
Less interest over time
Cons of Standard Repayment:
You may have higher monthly payments compared to the other options
Your monthly payment would remain the same even if your income dropped
Graduated Repayment
The graduated repayment plan allow you to start your payments off at a lower amount and gradually increase to the full payment over a 10-year period. This plan is ideal if you plan to start your career at a lower income level or do not plan to dive into full-time work immediately after graduation.
Eligible Borrowers
All borrowers are eligible for this plan.
Eligible Loans
Direct Subsidized and Unsubsidized Loans
Subsidized and Unsubsidized Federal Stafford Loans
All PLUS loans
All Consolidation Loans (Direct or FFELP)
Pros of Graduated Repayment:
The 10 year repayment period allows you to pay off your loans faster compared to other plans
Your payments might align better with the entry-level wages many new graduates take on
Cons of Graduated Repayment:
You would pay slightly more over time in comparison to the standard repayment plan since more interest would accrue while you’re making smaller payments
You could be in a tough spot if your income does not grow over time as you expect
Extended Repayment
The extended repayment plan is available to all borrowers except those with Federal Direct Loans or Federal Family Education Loans (FFEL) that owe less than $30,000. This option allows for either a fixed or graduated payment, leading to full repayment by the end of a 25 year period.
This option is ideal if you have a hefty total loan amount and need a smaller monthly payment.
Eligible Borrowers
If you’re a Direct Loan borrower, you must have more than $30,000 in outstanding Direct Loans.
Eligible Loans
Direct Subsidized and Unsubsidized Loans
Subsidized and Unsubsidized Federal Stafford Loans
All PLUS loans
All Consolidation Loans (Direct or FFELP)
Pros of Extended Repayment:
Lower monthly payments relative to other plans
You have the option to choose either fixed or graduated payments
Cons of Extended Repayment:
There is no option for loan forgiveness as with the income-driven repayment options
The longer repayment period would cause you to pay more interest over time in comparison to the other plans
Income-Driven Repayment
Income-driven repayment plans use your income to set a monthly payment. This amount is typically 10-20% of your income and can be as low as $0 if you’re unemployed. With these plans, your loan term is extended, usually to around 12-25 years. When this term is up, the remaining balance you owe will sometimes be forgiven. However, you would be required to pay taxes on the forgiven amount, so you are not totally off the hook.
There are 5 different income-driven repayment options offered for federal student loans. Each of the income-driven repayment options has its own specific requirements in order to qualify, but they’re all ideal for people whose monthly income is too low to pay the standard monthly payment.
The PAYE plan makes your monthly payment 10% of your discretionary income. The payments are reevaluated every year and updated if your income changes for any reason or if your family size changes. If you have not repaid your loan in full after 20 years, the remaining balance will be forgiven.
Eligible Borrowers:
If you are a new borrower from either on or after October 1, 2007 and received a Direct Loan disbursement on or after October 1, 2011
Eligible Loans
Direct Subsidized and Unsubsidized
Direct PLUS loans for students
Direct Consolidated Loans not including PLUS loans made to parents
2. Revised Pay As You Earn Repayment Plan (REPAYE)
The REPAYE plan makes your monthly payments 10% of your discretionary income and is recalculated every year in the same way the PAYE plan is. For undergraduate loans, your remaining balance will be forgiven after 20 years, and for graduate loans, 25 years.
Eligible Borrowers:
Any Direct Loan borrowers with an eligible loan type
Eligible Loans:
Direct Subsidized and Unsubsidized
Direct PLUS loans for students
Direct Consolidated Loans not including PLUS loans made to parents
3. Income-Based Repayment Plan (IBR)
An IBR plan sets monthly payments at either 10 or 15 percent of your discretionary income, neither amounting to more than what you would pay under the 10-year standard repayment plan. Payments are reevaluated every year based on changes in income and family size. Depending on when you received your first loan, your remaining balance will be forgiven after either 20 or 25 years. It is important to note that you may have to pay taxes on this forgiven amount.
Eligible Borrowers:
Those with high debt relative to their income
Eligible Loans:
Direct Subsidized and Unsubsidized
Subsidized and Unsubsidized Stafford Loans
All PLUS loans for students
Consolidation Loans not including PLUS loans made to parents
4. Income-Contingent Repayment Plan (ICR)
The ICR plan sets monthly payments at whichever is lesser: 20% of discretionary income OR the monthly payment you’d have on a plan with a fixed payment over 12 years, adjusted to your income. Payments are reevaluated and updated based on changes in your income and family size. Outstanding balances are forgiven after 25 years.
Eligible Borrowers:
Any Direct Loan borrower with an eligible loan type
Eligible Loans:
Direct Subsidized and Unsubsidized
Direct PLUS loans for students
Direct Consolidation Loans
5. Income-Sensitive Repayment (ISR)
The ISR plan sets monthly payments based on your annual income with the caveat that the loan is paid in full within 15 years.
Eligible Borrowers:
Only for FFELP Program loans
Eligible Loans:
Subsidized and Unsubsidized Stafford Loans
FFELP PLUS Loans
FFELP Consolidation Loans
Pros and Cons of Income-Driven Repayment
Pros
Cons
1.) Your monthly payments would likely be more affordable
2.) Your monthly payments would decrease if your income decreased, so you would not be locked into paying a certain amount each month even if you fall into economic hardship
1.) You may pay more in interest with a longer repayment period
2.) The total amount you pay could be more than the standard repayment plan depending on the plan you choose
3.) You must meet certain requirements in order to qualify
Private Student Loans
Private student loans can help you pay for college after you’ve exhausted scholarships, grants, and federal loans.
Private loans are made by private lenders such banks, credit unions, non-profits, and online lenders, and have terms and conditions that are set by the lender. Private student loans typically have higher interest rates and less flexible repayment options compared to federal student loans.
Who Can Get a Private Student Loan?
To qualify for a private student loan, you’ll need to attend an eligible school, as well as meet any age, education, or citizenship requirements. You’ll also need to meet a lender’s criteria for credit and income, or apply with a cosigner who does.
While most private student loans are credit-based, there are a handful of private student loans that are future-income-based. These are great for students who cannot meet the credit requirements and do not have access to a qualified cosigner.
How Much Can You Borrow?
Private student loans have a higher borrowing limit compared to federal loans. Private lenders allow you to borrow up to your school’s cost of attendance. With that said, it is wise to only borrow what you need — and what you can afford to repay.
How are Interest Rates Determined?
The interest rate on your private student loan depends on a few main factors:
Most private student loans are credit-based. That means the lender looks at your history of borrowing money and paying it back on time. They want to know how creditworthy, or how responsible you are with credit, before approving your student loan application.
In general, a higher credit score leads to a lower interest rate. The reverse is also true — a lower credit score leads to a higher interest rate.
Type of interest rate (fixed vs variable)
Most private lenders allow you to choose between a fixed and variable interest rate.
A fixed interest rate stays the same for the life of the loan. This means you’ll have a predictable student loan payment each month.
A variable interest rate fluctuates throughout the life of the loan depending on economic conditions. Variable interest rates often start out lower than fixed rates but can change, so your monthly student loan payments may vary considerably from month to month.
In general, fixed student loan interest rates are a better option than variable rates. That is because fixed rates always stay the same, so you will know exactly how much you need to pay each month. If you’re unsure which rate to choose, go with fixed; it is the safer option and allows you to budget accordingly. If you’re comfortable taking a risk to potentially save on interest, consider a variable rate.
Loan term
Loan term, also called loan duration, is the length of time you’ll have to pay off your loan. Private student loan terms usually range between 5-20 years, with plenty of options in between. Keep in mind that the longer your loan term, the more time interest accrues — this leads to higher total cost.
A simple way to think about is:
The shorter the loan term, the higher the monthly payments. If you’re making high monthly payments, the faster the loan will be paid off and the lower the total cost, since interest has less time to accrue.
On the other hand, the longer the loan term, the lower the monthly payments.If you’re making low monthly payments, the slower the loan will be paid off and the higher the total cost, since interest has more time to accrue.
What is a Cosigner?
If you cannot qualify for a student loan on your own, most private lenders will encourage you to apply with a cosigner. A cosigner is a person – such as a parent, close family member, or friend – who pledges to pay back the loan if you do not. This can be a benefit both to you and your lender since many many college-bound high school students have not had time to build up their own credit. However, it is risky to be the cosigner because if the student is unable to pay the loan back, the cosigner is responsible to pay on their behalf.
Private Student Loan Repayment Plans
While repayment options depend on the lender, most private lenders offer some variation of the repayment plans below.
Repayment Option
Terms
Pros
Cons
Immediate Repayment
Make full payments as soon as the loan is disbursed, while you’re still in school.
You will minimize the interest you pay, resulting in the greatest savings. Because you’re paying down both interest and principal while you’re still in school, you’ll already have made a good start on repaying your loan by the time you graduate.
For many students, it is not realistic to make full monthly payments while still enrolled in college.
Interest-Only Repayment
Pay only interest while you’re in school.
Your monthly payments will be more manageable, and your loan balance will not grow while you’re in school.
You will not make any progress paying down your loan balance while you’re a student. But at least you will not owe more than you borrowed when it is time to start making full payments.
Partial Repayment
Pay $25 per month while you’re in school to reduce accrued interest.
You can keep your loan balance in check, and reduce the total amount repaid.
You’ll still owe more than you borrowed when you graduate, but your loan balance will not grow as quickly.
Deferred Repayment
Do not make any payments while you’re in school. Begin repayment after graduation or 6 months after graduation.
You will not have to make payments while you’re in school.
You will likely pay the highest overall cost since unpaid interest will be added to your principal amount at the end of your grace period.
Are there any discounts or fees on private student loans?
Auto-pay discount
Many lenders allow you to get an interest rate reduction by signing up for automatic payments. The autopay discount generally starts at 0.25% but can go up to 2%, depending on the lender.
Origination fee
An origination fee is a you must pay to offset a lender’s cost for issuing a loan. Private loans rarely have an origination fee, but all federal loans do (although at different rates: 1.057% for federal subsidized and unsubsidized and 4.228% for Federal PLUS).
Prepayment penalty
A prepayment penalty is a fee you would have to pay if you want to repay your loans early. It is not allowed on any student loans, federal or private.
Application fee
There is generally no cost to apply for private student loans.
Student Loan Refinance
What is Student Loan Refinancing?
Student loan refinancing is when a lender pays off your existing loans and gives you a new one with a lower interest rate or repayment plan. In the long run, this saves you money since you’ll be paying less interest.
Refinancing could look like this [note: this is a very basic example]:
Loan 1: $10,000 at 7.5% interest rate
Loan 2: 13,000 at 8.25% interest rate
~insert magical refinancing here~
New Loan: $23,000 at 5.25% interest rate
Notice that the new loan is for the same amount of total debt, however, the interest rate is lower. This would save you money in the long run since less interest would accrue.
Example of Refinancing Student Debt
To contextualize this information, let’s look at an example. Let’s say you took out a student loan of $36,405 at an interest rate of 4.66% during undergrad and you plan on paying it off over the next 10 years at a monthly rate of around $380. By the time you finish paying it off, you will have actually paid $45,614.52–the original $36,405 plus $9,208.42 in interest. On the other hand, if you refinance for an interest rate of 2.59% over the same ten-year period, you can reduce your monthly payments to $344.69, and pay only $4,956.52 in interest, saving $4,251.50 over the lifetime of the loan.
What Do I Need to Refinance?
Generally, you need a strong credit score (mid-high 600s), a stable income, or a qualified cosigner to refinance.
Should I Refinance My Loans?
You should refinance your loans if it will save money. Generally, a lower interest rate and shorter repayment plan will lead to extra savings.
When You Should Refinance
If the savings will be significant. If you can qualify for a better interest rate, it is a good idea to refinance. You do not need to have a perfect credit history. As long as you can get that lower interest rate, you’re likely going to save some coin.
If you have student loans with high variable interest rates. Variable interest rates do just as they’re called – they vary. It is challenging to predict what payments will be with a variable interest rate as it is always changing. Whether your variable interest rate is currently high or low, it may be a good idea to refinance if you can secure a lower fixed rate.
If the economy supports low interest rates. Interest rates are impacted by economic factors. If the rate environment is good, rates may be lower, and it may be a good idea to take advantage of that.
If your finances have improved. If your financial situation has improved since you first took out your loans, you may qualify for a better interest rate on a new loan.
When You Should Not Refinance
If you’re planning to pursue student loan forgiveness. If you are pursuing a program such as Public Service Loan Forgiveness, you should not refinance your student debt as it would make you ineligible for the program.
If you have Federal Loans and may experience a drop in income. When you refinance federal student loans, you lose the option to participate in federal repayment programs such as income-driven repayment and federal loan relief options.
If you’ve declared bankruptcy recently. It is significantly more difficult to refinance student debt if you have declared bankruptcy. While not impossible to refinance under these conditions, many lenders will require around 4-10 years to have passed since the bankruptcy filing before lending.
If you’ve had to default on student debt. Defaulting on a student loan is a red flag to lenders as it tells them that you may not be able to make consistent loan payments.
How Many Times Can I Refinance?
You are allowed to refinance as many times as you like, free of cost.
Final Thoughts from the Sparrow Nest
Our goal is to bring simplicity, choice, and transparency to an otherwise inefficient and opaque lending process. We hope this guide helps.
Around 43 million Americans owe a grand total of $1.7 trillion on their student loans and unfortunately, this number is projected to increase to roughly $2 trillion by 2022.
We all know $1.7 trillion is a massive number, and it’s important to recognize it as what it truly is: a crisis. The weight of student debt permeates every aspect of our lives.
This shouldn’t scare anyone away from their dream of pursuing a college education, but it is crucial to evaluate the vast impact of the crisis in which we’re living.
Here’s What You Need to Know About How the Student Debt Crisis Affects You:
Student loan debt impacts more than just the individuals desperately praying for their payments to disappear.
While there are various ways student loan debt impacts the economy, we’ll focus on three ways that impact the college student and recent graduate demographic most:
Shifting the Economic Power Away from Students and Recent Graduates
Since the 1980s, the cost of a college education has increased rapidly. A degree that cost roughly $53,000 in 1989 now costs around $104,000. The worst part? Wages haven’t increased at the same rate. This makes it harder and harder for college graduates to pay back their student loans.
As a result of this, students are increasingly disempowered when it comes to investing in a college education. Students hardly benefit from a rise in the cost of education, and rather, lenders, investors, and universities do. This leaves students in a tricky position, often forced to choose between taking out loans for a stronger education or opting for a lower-cost option that feels like less of a fit.
Lowering the Rates of Homeownership
Between 1970 and 2017, the rate of homeownership for Americans aged 20-34 has dropped nearly 10%. While there are various contributors to the drop in homeownership, the student debt crisis is a central factor.
To put it simply, holding an abundance of student debt prevents people from purchasing real estate. Knowing that you have upcoming loan payments can prevent you from being able to save for a down payment on a new home, or from getting into another monthly payment with rent.
While this isn’t as applicable to current college students, it is a large concern for almost everyone’s long-term goals (while it was nice during COVID, few people plan to live at the ‘rents’ place forever). Whether you plan to sell your first home and make a profit or leverage the equity for other expenses, homeownership is a sound financial decision. Not only does it mark a step in fully embracing one’s independence and freedom as an adult, but it helps support the long-term goals of both the individual property owner and the surrounding community.
Shifting Timelines of Typical Life Milestones
Regardless of any internet memes you see poking fun at the differences in generations, there are stark differences between today’s college students and those in our parents’ generation. Due to the increase in student loan debt, current borrowers are (practically) forced to delay traditional life milestones such as purchasing their first car or home, getting married, having children, and even retirement.
Roughly 21% of young millennials are waiting longer to get married and another 21% are delaying having kids due to their student debt. What may be most concerning is that roughly 40% of younger millennials are putting off saving for retirement. While perhaps not a pressing issue at a young age, this does raise concerns for the ability to retire down the line and could impact future generations as they prepare to support the generations before them.
Inequality Impact
There is substantial evidence highlighting the various disparities in the amount of student debt accumulated across racial and ethnic groups.
According to EducationData.org, “Black and African American college graduates owe an average of $25,000 more in student loan debt than White college graduates.” While this figure is important to understand, we must consider how this impacts the milestones we previously discussed.
The impact of student debt goes well beyond the payments and impacts how people engage in the world around them. This is crucial to understanding how deep the inequalities created by student loan debt truly go when left unchecked.
Hanson, M. (2021, June 9). Student Loan Debt by Race [2021]: Analysis of Statistics. EducationData.
Mental Health Impact
If you are a current student or recent graduate, you may be one of the individuals already feeling the mental health impact of student loan debt.
Psychologists have studied the relationship between student loan debt and mental health and have concluded that “student debt has been linked to depression, anxiety, and even thoughts of suicide.” This oftentimes comes from the feeling of being stuck or stagnant in one phase of life, or circumstance, due to one’s student loan debt.
While this doesn’t mean that everyone with student loan debt will experience mental health issues, it is becoming increasingly prevalent. In a survey of college counseling directors, 95 percent said that significant psychological problems are a major, increasing concern for their students
Currently, 1 in 4 young adults between the ages of 18-24 have a diagnosable mental illness. However, we can expect this number to worsen should the student debt crisis continue growing at its current rate.
What Can We Do About the Debt Crisis?
It may feel like we just dropped an absolute bomb on you, and in some ways, we probably have. The student debt crisis is serious, and we do need to think critically about how we can repair such a broken system. With that said, there are positive things happening to fix it.
Politicians are Recognizing the Crisis
More and more politicians are coming forward and recognizing the vast impact of the student debt crisis and sharing their plans to address it.
Acts are Being Proposed
Acts such as Elizabeth Warren’s Student Loan Fairness Act have been proposed to alter and improve the interest rates tied to federal loans.
Schools are Stepping Up
Many universities have announced plans to provide free or low-cost education to low-income students. For example, the University of Michigan created their High Achieving Involved Leader Scholarship to provide a 4-year education free of tuition and fees to qualified low-income students.
Big Tech is Getting Involved
Major tech companies, including Google, Amazon, Microsoft, and IBM, have started offering their own certification programs for a fraction of the cost of a traditional college degree. Their goal is to create standardized skillsets and equip students with the essential skills they need to get a job in high-paying, high-growth career fields. Best of all, the programs do not require a degree or any prior experience to be eligible.
Sparrow is Here to Help
If federal student loans don’t cover your education costs, a private student loan could help. We want to help you find the loan that fits your needs best, saving you both time and money. With Sparrow, you can compare personalized offers from multiple lenders to find the right student loan for you.
A 2019 study showed that most Americans live with some financial regret. One of the highest-ranked regrets was related to choices surrounding student loans.
Trying to figure out the difference between student loan options will leave you with gray hair by age 25. The truth is, there are tons of different options available, and it’s incredibly important to understand the differences to make the best decision for your education. The best place to start is understanding the differences between federal and private student loans.
So take a deep breath, and don’t worry. No gray hairs here. We’ll give you everything you need to know.
Who Issues the Loan?
Federal
The federal government issues these loans. Federal tax dollars paid by US citizens each year fund federal student aid programs
Private
Banks and other financial institutions issue private student loans.
Who is Eligible for the Loans?
Federal
In order to become eligible for federal student loans, you must meet the following requirements:
Demonstrate financial need: Financial need is calculated by taking the difference between the cost of attendance (COA) at a school and your Expected Family Contribution (EFC). While COA varies from school to school, your EFC does not change based on the school you attend.
Be a U.S. citizen or eligible noncitizen: some legal U.S. residents without citizenship may qualify.
Have a valid Social Security number: with the exception of students from the Republic of the Marshall Islands, Federated States of Micronesia, or the Republic of Palau.
Be registered with Selective Services: if you’re a male (you must register between the ages of 18 and 25).
Be enrolled or accepted for enrollment in an eligible degree or certificate program: You are not eligible to borrow federal loans unless you attend an eligible program.
Be enrolled at least half-time to be eligible for Direct Loan Program funds: most programs require you to be enrolled at least half-time.
Maintain satisfactory academic progress in college or career school: You must meet the standards for satisfactory academic progress toward a degree or certificate offered by your institution. Check with your school to find out its standards.
Complete and sign the Free Application for Federal Student Aid (FAFSA) form: FAFSA is used to determine your financial need.
Show you’re qualified to obtain a college or career school education: You must have a high-school diploma or a recognized equivalent such as a General Educational Development (GED) certificate.
Private
Not everyone will qualify for private student loans. Private lenders evaluate applicants based on a variety of factors, typically including the financial history and credit history of the applicant and/or the cosigner (if applicable). If the private lender deems you to be too risky of a borrower, they may not issue you a loan.
Applying with a cosigner who has a strong credit score could improve your chances of qualifying and allow you to access lower interest rates.
How Much Can You Borrow?
Federal
The amount you can borrow in federal loans depends on your student status.
A parent can also borrow a maximum of $20,500 in Direct Unsubsidized Loans per academic year via a Direct PLUS Loan.
Graduate/professional students can also borrow a Direct PLUS Loan, however, the amount varies from person to person depending on the cost of attendance at their respective institution and the financial aid they received.
To see how much money you can receive in federal loans, you will need to fill out the Free Application for Federal Student Aid (FAFSA). This is essentially an application that gives the federal government an idea of your expected financial need.
Private
The amount one can borrow in private student loans varies by lender. Typically, borrowers are able to fill the remaining balance they owe after accepting scholarships and/or federal loans with private student loans. Regardless, the amount you borrow from any private lender cannot exceed the total cost of attendance at your institution.
What are the Interest Rates?
Federal
Congress sets the interest rates on federal student loans. The rates vary based on the loan type and the disbursement date of the loan (the date the funds are paid to the student or school directly).
The table below provides interest rates for Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans first disbursed on or after July 1, 2021, and before July 1, 2022.
Loan Type
Borrower Type
Fixed Interest Rate
Direct Subsidized Loans & Direct Unsubsidized Loans
Undergraduate
5.50%
Direct Unsubsidized Loans
Graduate or Professional
7.05%
Direct PLUS Loans
Parents & Graduate or Professional Students
8.05%
Interest Rates for Direct Loans First Disbursed on or After July 1, 2023, and Before July 1, 2024
All federal student loans have fixed interest, meaning that the rate will not fluctuate for the life of the loan. Perkins Loans (regardless of the first disbursement date) have a fixed interest rate of 5%.
The interest rate on private student loans is based on a variety of factors. Most private lenders look at your financial history and credit score to assess the risk you pose as a borrower, which is reflected by the interest rate they offer you.
The lower your credit score, the more risk you present as a borrower — this means a higher interest rate. Similarly, the higher your credit score, the less risk you present as a borrower — this leads to a lower interest rate.
Unlike federal student loans, private student loan interest rates can be fixed or variable. You can use Sparrow to compare real interest rates from more than 15+ different lenders to ensure you’re getting the best rate possible.
When Do I Have to Start Paying the Loan?
Federal
Federal loans will go into repayment if you graduate, go below part-time student status, or leave school entirely. If you have a Direct Subsidized, Direct Unsubsidized, or Family Educational Loan, you will have a 6-month grace period before you are required to make consistent payments.3
It is important to note that Direct Unsubsidized loans and PLUS loans will accrue interest while you are in school. Direct Subsidized loans will not accrue interest while you are in school. So, while payments won’t be required until after the grace period, interest may be accruing depending on the loan type.
Private
Private loans typically don’t require consistent payments until after you leave school. Most lenders will implement a similar grace period to federal student loans, usually around 6 months after graduation. However, private student loans will accrue interest while in school, starting immediately after disbursement.
Is There an Advantage of One Over the Other?
Federal Loans
Private Student Loans
Pros
1. Typically don’t require good credit or a cosigner. 2. Come with additional benefits such as loan forgiveness programs and income-driven repayment options. 3. Interest rates tend to be lower than private loans.
1. Higher borrowing limit, up to 100% of the cost of attendance 3. You can apply online in a couple of minutes 2. Lowest interest rates on the market, if you have excellent credit.
Cons
1. There is a cap to how much you can borrow in federal student loans. 2. Not all students will qualify for subsidized student loans.
1. You may need a cosigner to qualify for a private student loan. 2. Not accessible to borrowers who lack a strong credit score or creditworthy cosigner
Final Thoughts
There’s a lot to understand about federal and private student loans, but the good news is that if you’ve made it to this point in the article (shoutout to you!) you’re already one step closer to making an educated decision when it comes to your loans.
During his 2020 presidential campaign, President Joe Biden emphasized time and time again his plan to cancel student debt. This has sparked a conversation about what this really means and whether or not we should actually do it.
If you happen to be one of the 43 million Americans whose student debt is part of the national total of $1.7 trillion, this may sound like music to your ears. However, there are pros and cons to canceling student debt that are important to consider.
*Article as of December 2022. For updated information on President Biden’s student debt cancelation actions, please visit the rest of our blog.
What Does Student Debt Cancellation Really Mean?
Canceling federal student loan debt would relieve borrowers of the obligation to pay back federal student loans.
Biden’s Proposed Plan
Biden’s presidential campaign focused largely on changes in higher education and student debt.
Biden has supported the immediate cancellation of $10,000 of federal student loan debt per person as part of COVID-19 relief.
Democrats and progressives alike have been advocating for student borrowers and asked Biden to cancel $50,000 of federal student debt per borrower instead of his planned $10,000. While ambitious, politicians such as Senator Chuck Schumer and Senator Elizabeth Warren believe it is possible and warranted.
However, Biden previously stated that he doesn’t believe he has the authority to cancel such large sums of student loan debt. In some interviews, Biden even suggested that he disagrees with canceling such large amounts.
However, in August 2022, Biden announced a plan to cancel up to $20,000 in student loan debt per borrower. Due to litigation surrounding the action however, it is currently on hold.
Specific Areas of Forgiveness
In Biden’s federal student debt plan, he proposed forgiveness in the following ways:
For those who earn less than $125,000/year.
For undergraduate student loans. Graduate students’ debt would not be canceled under Biden’s proposed plan.
For those at public colleges and universities, as well as private HBCUs and minority-serving institutions.
People with private student loans would not be impacted or relieved of their debt under this plan.
Free Tuition
In Biden’s American Families Plan, he proposed making college tuition-free for some schools such as:
Community colleges
Minority-serving institutions such as HBCUs
It’s important to note that this plan covers tuition and tuition only, meaning you would still have to pay the additional costs like room and board, meal plan, and fees.
Increased Support for Public Servants
Biden plans to provide more student debt support to people pursuing public service by:
Forgiving up to $50,000 and immediately canceling $10,000 for each year someone completes an eligible form of public service. People in this category would be eligible for 5 years of this loan forgiveness.
Making changes to the current Public Service Loan Forgiveness Program (PSLF). His changes would allow more loans to qualify for forgiveness and for specific amounts of forgiveness after 5 years of public service. Biden’s additions would not replace the current PSLF program.
Larger Pell Grants
The Pell Grant is a form of need-based federal financial aid that typically does not have to be repaid. It is meant to help eligible low-income students pay for college costs, including tuition, fees, room and board, and other educational expenses. As of 2021, the maximum Pell Grant is $6,495 and the minimum is $650.
In Biden’s 2022 budget, he requested to increase the maximum amount for Pell Grants by $400.
Income-Driven Repayment
In his campaign, Biden proposed a new income-driven repayment plan for federal student loans. It includes:
Undergraduate loans only. Graduate student loans would not qualify for this repayment option.
Automatic enrollment. Everyone would be automatically enrolled in this plan and would need to opt-out on their own if they didn’t want to participate.
Untaxed forgiveness. Current loan forgiveness programs typically tax the amount you are forgiven. Under Biden’s plan, the amount owed in student loan debt would be forgiven tax-free after 20 years.
$0 monthly payments. If you make less than $25,000 per year, your monthly payments would be $0 under Biden’s proposed plan.
What Does This Mean for People with Private Student Loans?
Biden does not have the authority to cancel private loans. His plans focus on federal student loans, as they are owned by the government.
Private lenders provide money to borrowers on their own terms separate from the government. If you have private loans and student debt forgiveness does happen, your private student loans will remain as is.
The Pros and the Cons
In no way is this an exhaustive list of the pros and cons of canceling student debt, but these are the main arguments for and against it:
The Pros
Any amount of student loan forgiveness would benefit those in debt.
It could stimulate the overall economy. If borrowers were able to divert some of their money from making student loan payments to things like buying a house, it could lead to overall economic growth.
It could help alleviate some of the disparities caused by student loan debt. There are racial and ethnic disparities within the student debt crisis, and canceling even some student loan debt could help even the playing field.
The Cons
Student debt cancellation does nothing to address the root of the problem: the high cost of a college education in today’s world.
Some say it could lead to an incredibly privileged class of recent college graduates.
Final Thoughts
The answer to whether or not we should cancel student debt really comes down to how you personally weigh the pros and cons in your mind. What we do know is that there has been a lot of talk surrounding the topic and many politicians and companies are stepping forward in support of student debt cancellation.
What Does Student Debt Cancellation Really Mean?