High schools grads have a lot of decisions to make before they head off to college, but maybe the most important is how they're going to pay for their degree.
For many, this is a family affair: Parents—and even grandparents—are usually involved in the college-financing discussion. Regardless, of who's footing the bill, everyone involved should have a clear understanding of your payment options and responsibilities, says Rick Castellano, vice president of corporate communications at Sallie Mae. Plan a time to sit down together and talk through your options and expectations, the sooner the better.
"We find time after time that the families who sit down and work out a plan are better equipped to pay for college," says Castellano, noting that students and their families should discuss how much savings they have set aside for tuition, how much debt they're willing to take on, and what the student's career plans are for after college.
"You want to go into this with your eyes wide open and managing expectations of how much debt you’ll carry after."
With that in mind, here are some tips if you're considering taking out student loans.
1. Fill out FAFSA form first
Before you do anything, you should fill out the Free Application for Federal Student Aid, or FAFSA, form, says Castellano.
It isn't always easy to fill out FAFSA, but it is a borrower's "gateway to billions of dollars in financial aid" in the form of scholarships, grants, work-study programs, and federal loans, says Castellano. Many people think they won't be eligible for anything and so don't bother filling it out, but that's rarely the case.
A few things to keep in mind: You'll want to understand the differences between the types of aid offered to you. For example, there's an obvious difference between a grant that doesn't need to be repaid and a loan that does. But there are also subsidized and unsubsidized loans. Subsidized loans are based on need, and the U.S. Department of Education pays the interest while you’re in school. With unsubsidized loans, you’re responsible for all of the interest from the time you take it out.
You also don't have to accept all of the aid you're offered. Take only what you need to keep your debt total in check, advises Castellano. On the other hand, if you're not satisfied with the aid you're offered, you can appeal your financial aid package.
Another important note: The FAFSA opens October 1 each year, and aid is awarded on a rolling basis. It's still open for the 2022-2023 school year, and you can also plan ahead to fill it out early for next year. Here's a list of everything you need to apply.
2. Consider non-loan options
Scholarships aren't just for valedictorians and football stars. There are millions of scholarships available across the country for all manner of recipients, but they might take some detective work to find. Take advantage of search engines, like Sallie Mae's, which aggregate millions of scholarships in one place. You can also contact your college's financial aid office to see what scholarships it offers.
States also have aid programs that can help eligible residents (the Cal Grant and the New York State Tuition Assistance Program are two examples). In some cases, filling out the FAFSA is enough to apply for this aid; other times, states have their own applications. Deadlines for this aid vary by state, but it's often first-come, first-served so you'll want to apply early.
Castellano says after FAFSA, scholarships, and family savings (if available) should be part of the conversation. Once those pieces of the puzzle are put into place, you can look into loans, he says.
Loans should complement scholarships, personal savings, and other means of paying for school if possible, he says. "In rare cases should they be the sole way you’re paying for college."
3. Opt for federal loans over private loans
Student loans can come from the federal government or a private lender. "Typically, students will want to borrow federal loans first before considering a private lender," says Liz Frazier, a certified financial planner and executive director of financial literacy at Copper Banking. "Federal loan interest rates are usually lower, and they have more flexible repayment options."
You also don't need a credit history to qualify for federal loans, while private loans require one, which may mean you need to get a co-signor for your loans. There are also have caps on how much you can take out in federal loans each year.
On the repayment front, borrowers with federal loans may be able to qualify for forgiveness programs, like the Public Service Loan Forgiveness (PSLF) program. There are also income-based repayment programs, where your monthly payment is determined by your income and family size.
While some private lenders offer flexible payment plans or help borrowers who are having trouble paying their bill each month, there's no guarantee they will. Borrowers with federal loans can also put their loans into deferment if they need to, during which they do not have to make payments.
Families should also understand that Parent PLUS loans—taken out by parents or grandparents of the student—do not have as many options for forgiveness and refinancing as other types of federal loans, and the maximum loan amount is the cost of attendance minus any other financial assistance the child receives, which can get borrowers into trouble if they take out too much money and end up with a big loan to pay off.
"Most families believe paying for college is a shared responsibility," says Castellano. But "you’re seeing parents get in way over their heads...they're over-borrowing."
If you've exhausted your federal loan options and still need more financing, then you can look at private loans—just don't take out more than is absolutely necessary. Make sure to shop around for the best interest rate.
"Borrow as little as you need, not as much as you can. Don't treat loan limits as targets," says Mark Kantrowitz, president at PrivateStudentLoans.guru.
4. Understand interest and monthly payments
When you're calculating how much debt you can afford to take on, you'll want to take interest into account, says Castellano. Federal loans have a set interest rate, which changes each year. Last year it was 3.73% for undergraduate direct loans, but like other interest rates, it will go up this year.
"When you go to pay back your student loans, understand your payments start by going to interest and fees first, before principal," he says. Interest accrues daily, and you'll pay an originator fee on your loan. Currently, all interest and monthly payments on federal loans are paused until Aug. 31, 2022.
You can play around with some online calculators to give you a sense of how much your monthly payment might be when you graduate. Note that the current average monthly payment is around $400, according to the Federal Reserve. It's important for families to understand how that expense will fit into a student's post-grad budget.
If possible, it's good for student and their families to make regular payments while in school. Even a little bit of money thrown at your loan early on can help save you in interest over the ensuing years.
5. Don't count on forgiveness
Though wide-scale student loan forgiveness is reportedly being considered by President Joe Biden, Castellano urges families not to figure it into their student loan calculations. Not only is it not guaranteed to happen, but you still need to be smart about the debt you take out. For those with private debt, it's not likely to happen at all.
"The bigger picture is what are we going to do on the front end to make sure we’re not in the same situation in 10 years," says Castellano. "If the federal government is still lending billions of dollars a year, and tuition is increasing every year…we haven't done anything to fix the broader system."
Of course, there are a few caveats. If you plan to go into public service (like teaching for a public school or working for the government), then you'll want to acquaint yourself with PSLF. Borrowers who meet the strict program requirements will have their loans forgiven after 10 years of on-time payments. And borrowers an income-based repayment plan can also have their balances forgiven after 20 to 25 years. But that's still two-decades-plus of payments you need to make.
Paying for college in the U.S. can be complicated and expensive. But sitting down and working through your financing options and making a long-term plan can help you take on debt with clear eyes.
This story was originally featured on Fortune.com