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Paying for College:
» Strategies for Paying the Bill
Understanding Loan Repayment
Know Your Options
Even if paying back a loan is years away, it's a good idea to know what you're getting into.
How repayment works
For need-based student loans, you won't be expected to begin repaying your loans until after you graduate or leave school. After graduation, you're given a grace period (usually between three and six months) when you're not required to make payments. After the grace period ends, you'll be responsible for making monthly payments.
Repayment options
There are a number of ways to repay your education loans:
- Standard repayment: Most students repay their loans with a standard repayment plan (e.g., by making equal monthly payments over a ten-year repayment period).
- Graduated and income-contingent repayment: Both of these options allow you to lower your monthly payments by as much as 40 percent. With a graduated plan, your payments will gradually increase, usually every two years. Your salary may be increasing over time, too. An income-contingent plan ties your repayment amount to your income and often allows for a longer repayment period. Although you'll be paying less per month, you'll end up owing (and paying) more in the long run because you're slowing down your repayment.
Repayment tips
- Keep track of what you owe
Stay on top of your balance and what your repayments will be. It's a good idea to understand what your monthly repayment amount will be when you borrow or are considering a loan.
- Visit the aid office
When you feel you're taking on more than you can afford to repay, ask them for advice. Ideally, you'll be able to come up with a plan to cut back on your level of borrowing. If that doesn't work, an aid counselor can advise you about options that will make it easier for you to deal with your debt.
- Know the language
Here are some terms you should know:
- Loan consolidation:
Loan consolidation means combining different types of loans or the same loan from different lenders. All your loans are folded into a new loan with one repayment. You'll have more time to pay off your loan. The downside is the likelihood that it will cost you more to pay off all of your loans.
- Deferment:
This is a period during which you don't have to make payments on your loan. For example, you can receive a deferment of your loan when you're in graduate school, in the military, or if you join the Peace Corps or other public service programs.
- Forbearance:
This provision allows you to temporarily stop loan payments because of financial hardship.
- Cancellation:
Some loans allow you to "work" off your loans. For example, if you teach in a school that serves a low-income population, you can have between 15 and 30 percent of your Perkins loan canceled for each year of work.
Repayment and your credit
An important reason to keep up with your loan payments is to stay credit-worthy. Your student loan may be the first time you borrow money. After college, it's likely that you'll also want to take out other loans, perhaps to buy a car or purchase a home. To get these loans approved, you need a good credit rating. If you fall behind with your student loan payments, you'll receive an adverse credit report.
What Plans Are Offered By Your College?
Look At Ways To Spread Out Your Payments
After you've selected a college, you'll receive a student bill that lists your costs. Gift and loan aid will be subtracted from the total, leaving an amount for you to pay.
The college will have various payment options
Choose the plan that gives you the most time to pay, usually by the month. If the college charges a fee for its extended payment plan, weigh the extra cost against what you will earn by holding onto your money for a longer period of time.
If the college does not offer a monthly option
If such a monthly option is not available, ask for a recommendation about a commercial plan.
Be prepared for non-billable costs
Non-billable costs are college expenses on top of the amount you are billed. Be prepared to pay directly for books and supplies, personal items, and travel. Plus, if you don't live and eat on-campus, those costs will be handled separately.
Use Your Savings
Now Is The Time To Use Your Money
When you're deciding where your family share is going to come from, don't limit yourself to what's available from income. Expect to contribute a portion of your savings.
Parent resources
If your family has assets that are readily available (e.g., savings or mutual funds), plan to use some of that money for college. The formula that calculates the expected contribution by your parents uses a five percent spending rate as a guideline. We recommend this as a starting point, but you are the best judge of whether you can spend more or less than five percent.
Your resources
There often is money in your name, too. If you qualify for aid, 35 percent of that money will be expected to go to college expenses in the first year, 35 percent of what is left over the second year, and so forth through the four years.
The net effect of this formula is to expect that about 80 percent of student savings will go towards college expenses. Each year you should contribute the amount specified in your award letter.
If you won't be receiving financial aid, you decide how to spend student savings. As a rough guideline, divide the total by five. Use 1/5 each year (assuming four years of education), and you will have 1/5 remaining when you graduate.
IRA accounts
- Traditional IRA
If you've set up an IRA account, you're permitted to withdraw money for college expenses without paying the 10 percent early withdrawal penalty. However, you will owe income taxes on the amount withdrawn.
- Roth IRA
You may withdraw your contributions to a Roth IRA to pay for college expenses without having to pay either income tax or the ten percent early withdrawal penalty. Any investment earnings in your Roth IRA are also available for withdrawal without the ten percent penalty, but subject to regular income tax. You may withdraw investment earnings tax-free if you are over 59 1/2 and you've had your Roth IRA for at least five years.
- Education IRA
You can use your money to pay for college without paying the ten percent penalty and without paying federal taxes.
Don't Forget About Tuition Tax Credits
The Timing May Not Be Right, But The Money May Be There
If you meet certain conditions, you can qualify for a reduction of up to $1,500 in the amount of federal income tax you owe. The two tax credit programs of the federal government are Hope and Lifetime Learning.
The Hope Tax Credit
- This tax credit is for tuition and fee expenses for the first two years of post-secondary education.
- The student must be at least 1/2 time.
- The maximum yearly credit per student is $1,500.
- There is no limit on how many family members can receive the credit.
- The credit is available to taxpayers whose income is under $100,000 if filing a joint return, or $50,000 if filing a single return. The amount of the credit begins to phase out between $80,000 and $100,000 for a joint return, and $40,000 and $50,000 for a single return. These are 1998 income limits that are inflated yearly.
The Lifetime Learning Tax Credit
- Like the Hope credit, the Lifetime Learning credit can only be used for tuition and fees. The credit can be claimed for 20 percent of the amount you pay.
- For post-secondary education after the first two years, it applies to undergraduate, graduate, and job-related education.
- The maximum yearly credit is $1,000. Beginning in 2003, the maximum will be $2,000. This is the limit per family, not per student.
- The family income limits to qualify for the Lifetime Learning credit are the same as for the Hope program.
Note: There are other rules and restrictions that apply to the Hope and Lifetime Learning credits. If you think you qualify, check with your tax preparer or financial adviser.
Your Loan Options
Education loans come in many shapes and sizes
There are lots of loan options out there. Read on for expert advice and information about all your options. First, some facts
- Nearly 60 percent of all financial aid comes in the form of loans.
- Some loans are need-based -- meaning that they're awarded when the family demonstrates financial need.
- Other education loans are not need-based. Instead, they're designed to help pay the family share of costs.
Second, some advice
Need-based loans tend to have better terms, so you should consider those loans first.
Student loans
There are three main types of Federal student loans:
- Perkins Loans
Perkins Loans are need-based loans and are awarded by the financial aid office to students with the highest need. The interest rate is very low -- 5 percent -- and you don't make any loan payments while in school.
- Subsidized Stafford or Direct Loans
These need-based loans have an interest rate in the 5-6 percent range. The federal government pays the yearly interest while you're in school. This is why they're called "subsidized" loans.
- Unsubsidized Stafford or Direct Loans
These loans aren't based on financial need and can be used to help pay the family share of costs. You're responsible for paying interest on the loan while in school. You may choose to capitalize the interest. The advantage of doing this is that no interest payments are required. The disadvantage is that the interest is added to the loan, meaning that you will repay more money to the lender.
Other student loan options
- Private student loans
A number of lenders and other financial institutions offer private education loans to students. These loans are not subsidized and usually carry a higher interest rate than the federal need-based loans. The College Board's Signature Loans are examples of private education loans for students.
- College-sponsored loans
Some colleges have their own loan funds. Interest rates may be lower than federal student loans. Read the college's financial aid information.
- Other loans
Besides setting up scholarships, some private organizations and foundations have loan programs as well. Borrowing terms may be quite favorable. You can use Scholarship Search to find these.
Parent Loans
Parents also have federal, private, and college-sponsored loan options.
- Federal PLUS loans
This program is the largest source of parent loans. Parents can borrow up to the full cost of attendance minus any aid received, and repayment starts 60 days after money is paid to college.
- Private parent loans
A number of lenders and other financial institutions offer private education loans for parents. These loans usually carry a higher interest rate than PLUS Loans.
- College-sponsored loans
A small number of colleges offer their own parent loans, usually at a better rate than PLUS. Check each college's aid materials to see if such loans are available.
What is a Federal Perkins Loan?
A Federal Perkins Loan is a low-interest (5 percent) loan for both undergraduate and graduate students with exceptional financial need. Your school is your lender. The loan is made with government funds with a share contributed by the school. You must repay this loan to your school.
How much can I borrow?
Depending on when you apply, your level of need, and the funding level of the school, you can borrow up to:
- $4,000 for each year of undergraduate study (the total amount you can borrow
as an undergraduate is $20,000 if you have completed two years of undergraduate
work; otherwise, the total you can borrow is $8,000).
- $6,000 for each year of graduate or professional study (the total amount
you can borrow as a graduate/professional student is $40,000, including any
Federal Perkins Loans you borrowed as an undergraduate).
Is there a charge for this loan?
A Perkins Loan borrower is not charged any fees. However, if you skip a payment, make a payment late, or make less than a full payment, you may have to pay a late charge. If your failure to make payments persists, you may have to pay collection costs as well.
How will I be paid?
Your school will either pay you directly (usually by check) or credit your account. Generally, you'll receive the loan in at least two payments during the academic year.
Will I have an opportunity to cancel my loan after I sign the promissory note?
Yes. Your school must notify you in writing whenever it credits your account with your Perkins Loan funds. This notification must be sent to you no earlier than 30 days before, and no later than 30 days after the school credits your account. You may cancel all or a portion of your loan if you inform your school that you wish to do so within 14 days after the date that your school sends you this notice, or by the first day of the payment period, whichever is later. Your school can tell you the first day of your payment period. If you receive Perkins Loan funds directly by check, you may refuse the funds by not endorsing the check.
Paying for College
It Pays to Save
College Costs
Financial Aid
Receiving Aid
» Strategies for Paying the Bill
Loans At-A-Glance
The White House Initiative gratefully acknowledges collegeboard.com for providing the content found on this page.
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