There’s no way around it: College is expensive, and the price is only growing. Between the 1992–1993 and 2022–2023 school years, the average annual tuition, fees, and room and board costs at a public four-year, in-state institution rose from $4,870 to $10,940 (after adjusting for inflation), according to the College Board. That’s no small cost, and many families are left scrambling to find ways to afford it — including student loans and other financial aid opportunities.
When done responsibly, student loans can be a useful tool to help make a college education more affordable for some students. If you’re not careful, though, you can end up taking on more than you can afford.
Here are some tips for what to think about before you take out a loan, and how to make smart decisions about paying for college.
Have the Tough Conversation
One of the first things you should do is have a serious conversation with your family about what you can afford. That way, you can have a realistic budget in mind while you’re researching schools, applying for scholarships, and reviewing offer letters. The last thing you want is to get your heart set on a school only to find out too late that you can’t afford it.
“There’s a lot of emotion involved in the college application process,” says Christine Miller, director of college advising at the Scholarship Fund of Alexandria. “But I think the earlier you can have those conversations as a family, and the more honest and open you can be about where your family is financially, the better it is as your student is going through the application process.”
While this might seem obvious, not every family has the talk. Only 53 percent of families reported having a plan for how to pay for college, down from last year’s 59 percent, according to Sallie Mae’s 2023 How America Pays for College report. Many parents are still struggling to pay off their own student loans; as of June, U.S. student loan debt totaled approximately $1.77 trillion, according to the Federal Reserve.
“It’s a hard discussion, sometimes, for parents and kids. But we certainly recommend it, especially if they’re going to start talking about huge sums of money,” says Tessie Wilson, chair of College Access Fairfax.
With an understanding of what price range will be manageable, you can research schools that will fall close to that price — the U.S. Department of Education has a net price calculator that can help you estimate the cost of attendance for different schools — and then move on to looking for aid.
Types of Aid
Once you know how much you can pay out of pocket and how much college will likely cost, you’ll have to understand the different types of aid:
Direct Subsidized Loans: Federal loans available for students with demonstrated financial need. The Department of Education pays the interest on these loans while you’re enrolled, for six months after you graduate, and during periods of deferment.
Direct Unsubsidized Loans: Federal loans that are not based on financial need. You’ll accrue interest on these loans once they are disbursed — even while you’re still in school.
Parent Plus Loans: A loan from the Department of Education for the guardian of a student. These are dependent on credit history and will begin to accrue interest once the loan is disbursed, unless the borrower requests a deferment.
Private Loans: These are loans that you get from a bank, not from the federal government. They typically have higher interest rates than federal loans.
Grants and Scholarships: These are financial aid options that do not need to be repaid. They can be federal aid like the Pell Grant, institutional aid from a college, or from third-party organizations that offer scholarships. These can be determined either by demonstrated financial need or by merit. They may be based on grades, test scores, participation in extracurricular activities, and personal essays.
Work-Study Jobs: This is a federal, need-based program that provides part-time jobs to students so they can earn at least the federal minimum wage while enrolled in school.
The amount of federal loans you’re allowed to borrow is limited. Taking into account your dependency status and what year you are in school, the limit will range from $5,500 to $12,500 per year. Outside of that, the interest on private loans will depend on your credit score. Wilson says that most students heading to college right after high school won’t qualify for these, since they don’t have credit histories.
And, of course, the less money you have to pay back after graduation, the better. Try to get the most out of scholarships and grants since they don’t have to be paid back. There are lots of options available if you look for them, and most schools have resources available to help you find them.
Understand the Application
To be eligible for financial aid, you’ll have to fill out the Free Application for Federal Student Aid, known as FAFSA. This application is how the federal government, the state, and colleges evaluate your financial need and determine how much aid you qualify for.
One thing that Miller says people often don’t understand is that the FAFSA does not automatically supply aid — it just decides your eligibility. When you’re accepted to a university, that school will present you with a letter spelling out your available aid, and then you’re responsible for accepting that aid.
Even if you think you know the drill, changes from the FAFSA Simplification Act go into effect for the 2024–25 school year. A streamlined form will ask fewer questions and will make it easier to import tax record data.
There will be several things different with how the new FAFSA works. For one, the student and one guardian will need to go online and create an FSA ID before they can fill out the application. This version of the FAFSA will require parents to give the Department of Education permission to access their tax information through the Internal Revenue Service. If they do not consent, the student will not be eligible for aid. And, this year, the FAFSA will not open until December (compared to the usual October 1 opening), so there’s less time to fill it out. Create your FSA ID early and be ready to fill out the details as soon as it opens.
Don’t skip the FAFSA, even if you think you won’t qualify for need-based aid, Wilson says. The FAFSA is required for even some merit-based university scholarships. Plus, it can serve as a safety net in the event of an unexpected financial change — such as a parent losing a job — that would put a student in need of aid on short notice.
“Unless you have FAFSA on file, those colleges and universities won’t even talk to you about what might be possible because of your changed circumstances,” Wilson says.
Don’t forget that college is a long-term commitment, especially if you’re planning to go to graduate school, law school, or medical school. Even small loans can really accumulate over time.
Do some research about what those loan payments will look like once you graduate. This means learning about what you’ll be required to pay, when you’ll owe it, what the loans’ interest rates are, and how much you expect to earn when you enter the workforce.
“It may seem kind of theoretical in the beginning of your undergraduate degree, but it becomes real very quickly,” Miller says.
Wilson says that one common rule of thumb is not to borrow more money than you expect to make in the first year of your career. If you’re entering a field where the average entry-level salary is $60,000, for example, you’ll want to make sure that the sum of all the loans you take out during your college career does not exceed that salary.
And applying for financial aid is not a one-and-done situation. You’ll need to submit the application every year you’re enrolled in college to maintain financial aid eligibility. You can continue to apply for scholarships and grants throughout your college career and may want to consider working as a teaching assistant or resident adviser to help you keep your debt level as low as possible.
Feature image, stock.adobe.com