Paying for College and Student Loans
Emma is a high school junior and just saw the price of her dream college: about $\$23{,}000$ for one year. Her family doesn't have that in a bank account. Does that mean she can't go? Not necessarily. Most students never pay the "sticker price" out of pocket. By the end of this page you'll know how to figure out what college really costs, where the money can come from, and how to tell a good loan from a risky one.
Cost of attendance and the funding gap
The cost of attendance (COA) is the full estimated price of one year of college. It is more than tuition. It includes:
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tuition and fees
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housing and food
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books and supplies
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transportation and personal expenses
Colleges publish their COA. Your funding gap is what is left after you subtract every source of money you already have lined up.
$$\text{gap} = \text{cost of attendance} - \text{grants and scholarships} - \text{work-study} - \text{savings and earnings}$$Noah's first year at an in-state public university costs $\$11,000$ in tuition and $\$12,000$ for housing, food, books, and other expenses. He receives a $\$3,500…
Noah's first year at an in-state public university costs $\$11,000$ in tuition and $\$12,000$ for housing, food, books, and other expenses. He receives a $\$3,500$ scholarship, a $\$2,000$ Pell Grant, and expects to contribute $\$4,000$ from savings and summer work.
(a) Calculate the total cost of attendance.
(b) Calculate the gap that remains after all of these sources.
(c) Suggest which kind of borrowing he should consider first for this gap, and explain why.
Sources of money for college
There are five main sources. The big question for each one: do I have to pay it back?
| Source | What it is | Repay? |
|---|---|---|
| Scholarship | Award for grades, sports, talent, or need. From colleges and private groups. | No |
| Grant | Need-based aid, such as the federal Pell Grant. | No |
| Work-study | A part-time campus job that is part of your aid package. You earn a paycheck. | No (you work for it) |
| Savings | Family savings and your own summer job money. A 529 plan is a tax-advantaged account for this. | No |
| Loans | Borrowed money plus interest. | Yes |
Scholarships and grants are called gift aid. Always use gift aid and savings first. A loan is the last piece of the puzzle, not the first.
List four sources of money that can help pay for college. Then classify each as money you do not have to repay (gift aid) or money you must repay: scholarship, Pell…
List four sources of money that can help pay for college. Then classify each as money you do not have to repay (gift aid) or money you must repay: scholarship, Pell Grant, federal student loan, private student loan.
The FAFSA
The FAFSA (Free Application for Federal Student Aid) is the form that opens the door to federal aid: Pell Grants, work-study, and federal student loans. Many states and colleges also use it to hand out their own aid. It is free. Never pay a website to file it.
What you typically need:
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your Social Security number and a federal tax return and W-2s (or other income records)
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bank balances and other assets
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the list of colleges you want to receive your information
If you are a dependent student (most students under 24 are), your parent or guardian must also provide information about their income and assets. Fill it out as early as you can, because some aid runs out.
What does FAFSA stand for, and what is its purpose? Name two types of information a student typically needs to complete it, and say who may need to provide information…
What does FAFSA stand for, and what is its purpose? Name two types of information a student typically needs to complete it, and say who may need to provide information if the student is a dependent.
Federal vs. private student loans
If a gap remains, borrow as little as you can. Not all loans are equal.
| Federal loans | Private loans | |
|---|---|---|
| Lender | U.S. Department of Education | Banks, credit unions, online lenders |
| Interest rate | Set by federal law each year; the same for all borrowers of that loan type, fixed for the life of the loan | Set by the lender; depends on credit score; can be fixed or variable |
| Credit check | Usually none for undergraduates | Yes. Students often need a cosigner |
| Repayment options | Standard plan, plus income-driven plans | Fewer options, set by the lender |
| If you struggle | Deferment, forbearance, income-driven plans, some forgiveness programs | Up to the lender; usually less flexible |
Because of these protections, the usual advice is: file the FAFSA, take scholarships and grants, then federal loans, and consider private loans last.
Compare federal student loans and private student loans. In your answer, address at least four of the following: who lends the money, how the interest rate is set,…
Compare federal student loans and private student loans. In your answer, address at least four of the following: who lends the money, how the interest rate is set, whether a credit check is required, repayment options, and options if the borrower has trouble paying.
How much does a loan really cost?
A loan's interest rate is a yearly percent. But to compare loans, it's often clearest to look at dollars:
$$\text{total repaid} = \text{monthly payment} \times \text{number of payments}$$ $$\text{total interest} = \text{total repaid} - \text{amount borrowed}$$ $$\text{interest as a percent of the loan} = \frac{\text{total interest}}{\text{amount borrowed}} \times 100\%$$The last number is a total over the whole loan, not a yearly rate. A loan with $30\%$ total interest over 10 years is nowhere near a $30\%$ annual rate.
A student borrows $\$10,000$ in a loan and agrees to repay it over 10 years with a total of $\$13,000$ paid back. How much of that total is interest? Is it correct to…
A student borrows $\$10,000$ in a loan and agrees to repay it over 10 years with a total of $\$13,000$ paid back. How much of that total is interest? Is it correct to say the student paid 30% interest per year? Explain briefly.
Camila takes out a student loan of $\$20,000$ and will repay it with fixed monthly payments of $\$212$ for 10 years (120 months). (a) Find the total amount she will…
Camila takes out a student loan of $\$20,000$ and will repay it with fixed monthly payments of $\$212$ for 10 years (120 months).
(a) Find the total amount she will repay.
(b) Find the total interest she will pay.
(c) What percent of the original loan does the total interest represent?
Comparing loans and checking affordability
When two loans have different lengths, compare both the monthly payment and the total cost. A longer loan usually has a lower monthly payment but costs more in total interest.
Cost is not the only factor. Ask: what if I lose my job? Federal loans offer income-driven plans, deferment, and forbearance. A cheaper private loan may offer none of that.
Is the payment manageable? A common rule of thumb compares the payment to your gross monthly income:
$$\text{payment share} = \frac{\text{monthly loan payment}}{\text{gross monthly income}}$$Many advisors suggest keeping student loan payments to roughly 10% of gross income or less. This is a rule of thumb, not an official limit.
The rate and the length of the repayment plan both change the total interest. A higher rate means more interest on every dollar you owe, and a longer plan means you owe interest for more years, so the total interest is larger even when the monthly payment is lower. Pausing payments with deferment can add even more interest if it capitalizes.
Isabella must borrow $\$15,000$. Option A is a federal loan with a fixed payment of $\$160$ per month for 10 years. Option B is a private loan with a fixed payment of…
Isabella must borrow $\$15,000$. Option A is a federal loan with a fixed payment of $\$160$ per month for 10 years. Option B is a private loan with a fixed payment of $\$135$ per month for 15 years, with a rate that depends on her cosigner's credit.
(a) Calculate the total repaid and total interest for each option.
(b) Which option costs less overall? Which has the lower monthly payment?
(c) Argue which option you would recommend, considering both cost and the flexibility to handle financial hardship.
Liam will borrow $\$8,000…
Liam will borrow $\$8,000$ each year for 4 years of college. Interest is not paid while he is in school, and for simplicity assume it does not capitalize. After graduating, he will repay the total borrowed amount over 10 years at a total cost of 140% of the amount borrowed.
(a) Find the total amount borrowed.
(b) Find the total he will repay and the total interest.
(c) Find his approximate monthly payment.
(d) Liam's expected starting salary is $\$42,000$ per year. Compute the share of his gross monthly income that the payment represents and discuss whether it seems manageable.
Back to Emma: she doesn't have to pay $\$23{,}000$ from savings. She can file the FAFSA, apply for scholarships and a Pell Grant, work part-time, and borrow only the leftover gap, starting with federal loans.