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By Julia Glum
November 10, 2020
Filip Fröhlich for Money

So you or someone you love has been accepted to college. Congratulations! Now it’s time to decide how to pay for it.

Higher education is valuable but pricey — for students attending public, four-year colleges in their state, the average tuition and fees costs $10,560, according to the College Board. That total grows when you add in room, board and textbooks. It’s even higher for out-of-state or private schools.

The first step in figuring out how to pay for college is to explore all the potential options for free money, including grants, scholarships and payment plans, according to Betsy Mayotte, the president and founder of The Institute of Student Loan Advisors. But if you’ve done that and your numbers still fall short, you might need to turn to student loans.

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Student loans are often referred to as “good debt,” or debt that has a high-value return on investment. They’re also common: According to The Institute on College Access and Success, more than 60% of the nation’s college seniors graduated with at least some student debt in 2019. Borrowers were on the hook for an average of $28,950.

Here’s how to get a student loan that works for you — and, eventually, pay it back.

Step 1: Figure out how much you’ll need

Start by doing some homework. But don’t just CTRL+F your desired college’s website for a dollar figure — that’ll likely give you the sticker price. What you actually need to know is the net price, which is how much you’ll pay after grants and scholarships are figured in.

You can use a net price calculator to determine this. Search for your college on the Education Department’s website here to find specific prices. Or type your info into the College Board’s cost calculator here to see estimates based on national averages. Tools like TuitionFit, Edmit, MeritMore, College Raptor and MyinTuition — all of which use financial aid data and self-reporting to generate projections — may be worth a visit, as well. (Some are free; some cost money.)

Though these calculators can give you a general idea of how much you can expect to pay for college, everyone’s situation is different. That’s why you’ll want to fill out the Free Application for Federal Student Aid next.

American citizens and some non-citizens are eligible for federal aid if they have a Social Security number and a high school diploma (or General Education Development certificate or homeschool equivalent). You’ll need to be accepted to or enrolled in a qualified college program and have registered for the draft (if you’re male). You’ll also need to be making steady progress toward your degree.

To submit the FAFSA, you’ll need that Social Security or Alien Registration Number, plus your family’s tax records, bank statements, investment records and documentation of untaxed income. The FAFSA also requires a Federal Student Aid account (called an FSA ID). Go to fafsa.gov to get started.

The FAFSA opens every year on Oct. 1 and has a lengthy eligibility period. It’s already open for the 2021-2022 academic year; it closes June 30, 2022. However, many states and schools award aid on a first-come, first-served basis. They also may have their own deadlines. That’s why you’re encouraged to do the FASFA as soon as you can every fall.

Once you’ve turned in your FAFSA, you’ll receive what’s called a student aid report. The student aid report will display your expected family contribution and indicate whether you qualify for a federal Pell Grant.

After you’ve been accepted to a college, you’ll typically get an award notification letter that explains the combination of grants, scholarships and government loans you’ve been deemed eligible for. (Read more about how to get free money for college here.) It’ll also give you instructions on how to accept, or confirm, your financial aid.

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Step 2: Choose a route

There are two major types of student loans: federal and private. Federal student loans are made by the government and overseen by the U.S. Department of Education, whereas private student loans are made by banks or other financial institutions.

Mayotte strongly recommends consumers stick with the federal loan program rather than going the private route because the government provides more opportunities for relief if borrowers end up struggling with repayment. (More on this later.) Federal student loans also tend to have lower interest rates than private student loans, and they’re also available regardless of your financial standing or credit history.

Let’s start with federal student loans. Variations include direct subsidized loans, direct unsubsidized loans, direct PLUS loans and direct consolidation loans.

Direct subsidized loans are for undergraduates who demonstrate financial need. One notable quirk is that the Education Department pays the interest on these loans while you’re enrolled in college and during a six-month grace period after you graduate.

That’s different than direct unsubsidized loans, which are for undergraduates as well as graduate/professional students and don’t require financial need. With direct unsubsidized loans, you’re on the hook for the interest as soon as you take out a loan.

You can put off paying it, but Mayotte says she encourages students to take care of interest as it accrues. That way, it’s not capitalized, or added to your principal. For undergraduate borrowers, the current interest rate for direct subsidized and unsubsidized loans is 2.75%. For graduate/professional borrowers, it’s 4.30%.

For direct subsidized and unsubsidized loans — also called Stafford loans — there are borrowing limits based on your year in school and your status as an independent or dependent student under FAFSA. You can see a detailed breakdown by grade here, but speaking broadly, limits for undergraduates range from $5,500 to $12,500 in federal loans a year.

It’s worth noting that there is a one-time loan fee of 1.057% for direct subsidized and unsubsidized loans first disbursed after Oct. 1, 2020.

Parents and graduate/professional students are also eligible for direct PLUS loans. These involve a basic credit check, but Mayotte says you’d “have to have some pretty heavy-hitting past delinquencies” to be denied. These loans carry higher interest rates — currently 5.3% — and a higher origination fee of 4.2%. The biggest PLUS loan you can get is the total cost of attendance minus your other financial aid.

Once you’ve exhausted your federal loan options, you might want to check into private lenders. Issued by companies like Sallie Mae, SoFi and Earnest, these loans are a lot less regulated. They’re contingent on your credit score, and they don’t necessarily have borrowing limits — which can be dangerous for a student who borrows more than they can ultimately afford.

As such, tread carefully. Many experts recommend students avoid private loans altogether, but if you are going to take them out, make sure to shop around and scrutinize each lender’s terms, fees and perks before committing.

Step 3: Consider other options

Student loans aren’t mandatory. You can also tap a home equity loan or home equity line of credit (HELOC) to pay for college. Interest rates may be more favorable, but because your house is your collateral, this strategy can be risky. You’re basically transferring the burden from one loan to another.

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Another way to manage college costs is to see whether your school offers a tuition payment plan. These can allow families to make payments over a period of time as opposed to all at once up front.

You may also have special circumstances that change the rules for you.

For example, the government provides scholarships and grants to students training for the military as well as to those whose parents and guardians died in Afghanistan or Iraq after 9/11. Service members with student loans — whether they’re private or federal — won’t see interest rates above 6% while on active duty. People with certain federal direct loans can defer repayment.

Undocumented students can’t access federal student loans, though they may qualify for in-state tuition or private student loans. Your criminal record may also impact your eligibility.

Step 4: Do the paperwork

After you fill out the FAFSA, you don’t need to submit a separate loan application to access federal loans. But there is other paperwork to complete with the U.S. Education Department. With federal student loans, you’ll have to do some entrance counseling that runs you through the basics of borrowing money. It’ll take about a half hour.

You’ll also need to sign a master promissory note in which you formally commit to paying back your loan plus any interest.

If you’re pursuing a private student loan, you’ll probably need to pass a credit check. According to the National Foundation for Credit Counseling, your lender is likely looking for you to have a score “in the high 600s” or above. The better your credit score, the better your loan terms and interest rates will be.

If you have bad credit or no credit history, you may need a co-signer. They can be a parent, a relative or a friend, but Steve Muszynski, CEO and founder of Splash Financial, says “you want to make sure that co-signer has a strong financial history.” That trust needs to go both ways: Like with other loans, a student loan co-signer agrees to share responsibility for the debt if the borrower doesn’t pay it back.

To prepare for a credit check or loan application and get an idea of where you stand, you may want to pull your credit report and review your credit history for any major errors. (Thanks to the pandemic, you can get one free credit report every week on AnnualCreditReport.com until April 2021.)

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Step 5: Pay it back

Mayotte urges borrowers to plan ahead for their first payment.

“Nothing should catch you by surprise,” she says. “Even when you’re borrowing your very first loan in your very first year of school, you should be doing that anticipating what your total borrowing is going to be.”

Her rule of thumb: If you had to borrow $10,000 your first year, you should assume you’re going to end up having to borrow about $50,000 overall. And for every $10,000 you borrow, you should assume you’re on the hook to pay roughly $125 a month for 10 years.

What you shouldn’t do, she says, is wait until you get your first post-graduation, post-grace period bill to decide on a path to paying it back.

If you think the payments are going to be too much for you, you should explore repayment options. Private loans aren’t super flexible, but federal ones are. Because of this, if you’ve got a mixture of both, Mayotte’s organization recommends tackling the private ones first.

There are tons of repayment options for federal loans; the government even has a loan simulator tool that helps you find your best repayment strategy based on your employment situation, location, salary, projected income growth, tax filing status and more. You can choose whether you’d prefer to pay your loan off fast, prioritize a smaller monthly payment and so on.

“You really should be doing a budget and figuring out how much you can afford to pay,” Mayotte says. “The name of the game is paying the least amount over time.”

One popular route is income-based repayment, which ties your monthly student loan bills to your earnings. You could have no required monthly payment, or you could be asked to pay up to 20% of your discretionary income.

After 20 or 25 years, depending on the income-based plan you qualify for, any outstanding debt will be forgiven. But keep in mind that while these plans can reduce how much you pay monthly, they may actually increase how much you pay over the long term because your monthly amount due may not be enough to pay down your principle.

If you have multiple servicers, you can also consider direct loan consolidation. Although this lets you combine several federal loans into one, it won’t lower your overall interest rate.

If you’re having trouble affording your student loan payments, the government allows borrowers to defer/postpone their payments or put loans into forbearance. In forbearance, interest always accrues; in deferment, interest will accrue on most loans, though there are some that are exempt.

For this reason, the Education Department urges borrowers to learn their other repayment options before resorting to deferment and forbearance. In most cases, enrolling in an income-driven repayment plan to lower your monthly payment to a more affordable amount is preferable to either forbearance or deferment. (If you’re already in one of these plans but are still struggling to afford your debt, you may be able to update your financial information to reduce your payment.)

Private loan companies often have forbearance options, too, but they may come with a fee or be less generous than federal ones. Should you choose to refinance your loans, companies like Muszynski’s Splash Financial or Credible can help you compare interest rates and (hopefully) save money.

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Ultimately, you want to do everything you can to avoid missing payments. Not only does it start you down a path to delinquency, which can affect your credit score, but it can also push your loan into default. There’s a long list of consequences for defaulting on your student loans — it can impact your eligibility for more aid, stop you from accessing deferments and prevent you from getting your transcript. The government can withhold money from your tax refunds. You might even end up in court.

Before it gets to that point, you should reach out to your servicer, a financial advisor, a student loan counselor or a group like Mayotte’s for help.

“If you’re struggling, you should always call,” Mayotte adds. “Especially with federal student loans, it’s very rare that we can’t find a solution for you.”

Admittedly, the pandemic has altered some of the traditional student loan advice. For example, the CARES Act — and then an executive order from President Donald Trump — has placed all federally held student loans on pause for the time being. They’re in automatic administrative forbearance, meaning borrowers are not required to make monthly payments and interest will not accrue until at least Dec. 31. (Note: Just because you’re not forced to pay doesn’t mean you shouldn’t. You may want to capitalize on this opportunity and pay your principal down directly. It depends on your individual financial situation.)

As you pay off your student loans, you should also keep an eye on what’s happening in U.S. politics. It may impact your student debt burden.

President-elect Joe Biden‘s pandemic recovery plan includes a promise to forgive $10,000 of debt for each student loan borrower. Separately, he’s said he wants to tweak income-driven repayment plans so that borrowers won’t have to start paying their bills until they make a $25,000 salary. Biden also wants to change the Public Service Loan Forgiveness program, which currently forgives loans for certain employees who make 120 monthly payments.

Even with these possibilities, you’ll still want to be cautious with your loans.

“Never borrow more than you need, and never borrow anticipating forgiveness,” Mayotte says.

More from Money:

What Can Student Loan Borrowers Expect Under a Biden Presidency?

Student Loan Strategies: How to Borrow Smartly (and Maybe, Less) for College

What Happens to Your Student Loans If You Die?