How to Pay for College: A Student Loans and Scholarships Primer

How to Pay for College

Because a college education is as super important as it is stupid expensive.

For high school seniors, the leaves changing colors take on a different meaning than it has before. it used to mean stuff like homecoming, Halloween dances, and football season, now it means that college application season is underway. And as your kids start making their final decisions this fall on which schools they want to apply to, the price tag for that education will become a major, looming factor.

If you have the money to pay for your kid’s entire education out-of-pocket, then bully for you. Seriously. But for most people, that’s just not the case. For them, paying for college means taking out student loans. It won’t be just a few thousand dollars in student loans either. According to a recent study by the Consumer Financial Protection Bureau (CFPB), the number of students with $20,000 in student debt has doubled since 2002. Yowzers!

These days, the decision on how to finance their college education is one of the largest financial decisions that a young adult can make. And, in many, cases it’s also the first major financial decision they’ll make. Not a great combination, right?

Well, that’s why we’ve put together this handy-dandy primer on college costs and financing to show you how to pay for college.

How much will college really cost?

Back in the day, a person might have been able to work a job on the side or over the summer that would pay for their education, But that is no longer the case—by a long shot. In fact, over the last 20 years, the average cost of in-state tuition and fees for public universities has risen 237 percent according to U.S. News and World Report.

“It is no longer possible to work your way through college, except possibly at a community college,” says Mark Kantrowitz, Publisher and VP of Strategy for and a leading expert on college planning. “Students who work a full-time job are half as likely to graduate as students who work 12 hours or less per week.”

When you’re trying to figure out how much a given school is going to cost you, remember that costs aren’t just about tuition. Unless you plan on crashing on a friend’s couch, eating out of dumpsters, and reading books over your classmates’ shoulders for four whole years, you’re going to encounter additional costs.

“Use the net price when comparing college costs, says Kantrowtiz. “The net price is the difference between total college costs (tuition, fees, room, board, books, supplies, equipment, transportation and miscellaneous/personal expenses) and just the gift aid (grants, scholarships and other money that does not need to be repaid).

“Think of it as a discounted sticker price. The net price is the amount of money you will have to pay from savings, income, and loans to cover college costs.”

This is a good reminder that you won’t be able to figure out the true cost of a given school until after you’ve been accepted and have received their financial aid offer. Sure, that small liberal arts school might have a much higher tuition than the local state school, but if they are offering you more aid, the net price might be much lower.

“Don’t forget about education tax benefits, such as the American Opportunity Tax Credit (AOTC). The AOTC provides a partially refundable tax credit of up to $2,500 based on amounts you pay for tuition and textbooks,” says Kantrowtiz.

Costs will also vary, depending on your specific situation. For instance, if you are able to go to school while still living at home, that can be a great way to save. Sure, living with your parents is about as far from the “classic dorm experience” as you can get—unless your folks are super rad—but, hey, not incurring a crippling amount of debt is pretty rad as well.

Once you’ve figured out how much a school is really going to cost, then you can start figuring out how to pay for it.

Federal vs. private student loans

If you’re lucky, talented, or both, then you’re likely going to qualify for some combination of federal or state grants, work-study funds, and scholarships to pay for your college education. But, in all likelihood, it won’t be enough to cover everything. And paying for the rest is probably going to mean taking out debt.

If that’s the case, then taking out a loan from the federal government is the best way to do it.

Kantrowitz agrees. He says that “Students should borrow federal first because federal student loans are cheaper, more available and have better repayment terms than private student loans.”

How much cheaper are federal loans? Well, CNBC reported in July 2017 that the average interest rate for a private student loan was 7.81 percent for a loan with a variable rate and 9.66 percent for a fixed rate. The average rate for federal student loans? 4.45 percent.

That might not seem like much of a difference, but it is. Student loans are structured as installment loans, which means they’re paid back in a series of small, regular payments over many years. Given how long a student loan takes to pay off (usually anywhere between and 10 and 25 years says the CFPB), a few extra percentage points in annual interest can save you tens of thousands of dollars by the time your loans are fully paid back.

Additionally, subsidized federal loans come with periods during which the loan doesn’t earn interest and/or where you don’t have to make payments. Generally, if you’re enrolled in school more than half-time, you don’t have to make any payments on your federal loans.

And while the terms of private loans will vary from lender from lender, they’re usually not so great about deferring payment. Their loan terms are more like the terms you’ll find on standard personal loans. That means paying the loan back while you’re still in school!

Now, granted, federal student loans are far from perfect. You’ll still have thousands upon thousands in debt that will take you years (probably decades) to pay off. And the CFPB is currently suing Navient, the nation’s largest servicer of both federal and private student loans for “systematically and illegally failing borrowers at every stage of repayment.”

Okay, so maybe “not perfect” is a bit of an understatement.

Still, federal student loans are far preferable to private loans. They’re cheaper; they come with more flexible payment terms; and did we mention that they’re cheaper?

Types of federal student loans

There are tons of different kinds of federal student loans, most of which are for incredibly specific fields of study. But there are four types of loans that are commonly available. Odds are good that they’re the ones you (or your kid) will be dealing with.

They are…

  • Direct Subsidized Loans: Also known as “Stafford Loans,” these loans are available for undergraduate students that display a financial need for assistance. Your school determines how much you can borrow. The current interest rate for these loans is 4.45 percent. With a Subsidized Loan, the government pays the interest on the loan while you’re enrolled in school at least half-time, during the first six months after you graduate, or while you’re in a “deferment” period.
  • Direct Unsubsidized Loans: These loans are available for undergraduate, graduate, and professional degree students. (They are also called Stafford Loans.) A financial need is not required for an Unsubsidized Loan, but your school still decides how much you can borrow. The interest rate for undergraduates is 4.45 percent; the rate for graduate and professional degree students is six percent. With an unsubsidized loan, there are no periods where the government pays the interest.
  • Direct PLUS Loans: These loans are available for undergraduate, graduate, and professional degree students, as well as the parents of a financially dependent student. Whereas Stafford Loans don’t require a credit check, the borrower for a Direct PLUS Loan must not (to use the Department of Education’s phrasing) have an “adverse” credit history. The current interest rate is seven percent.
  • Federal Perkins Loans: These loans are for undergraduate, graduate, and professional degree students who demonstrate an “exceptional” financial need. The interest rate for these loans is five percent. Although Perkins Loans are federally funded, they are also issued by your school. Not all schools participate in the program, and eligibility can hinge on how much Perkins funding your school has available.

The government also offers debt consolidation loans that allow you to combine all your other federal student debt into a single loan. Consolidation loans usually come with longer repayment terms, which means a lower monthly payment; but it also means that you will pay more money over time. The interest rates for these consolidation loans are determined by a weighted average of the rates on the loans being consolidated.

(This information has been gathered from

Applying for federal loans

Another point in favor of federal student loans is that the application process is a bit easier than for private student loans. All you have to do is fill out the Free Application for Federal Student Aid (FAFSA). You can access the form at

The FAFSA is still kind of a pain though. Ask any parent or student who’s had to fill one out before. The involuntary shudder at the mere mention of the FAFSA will give an idea of what’s in store.

One of the great things about the FAFSA is that it’s used by your state and the school itself to determine what kind of aid you qualify for. And it’s not just loans either! You’ll also be applying for grants, work-study funds, and, sometimes, individual scholarships from the school itself.

Federal aid is administered through the school that the student is attending. So once you’ve filled out and submitted the FAFSA, you’ll hear back from the school to tell you how much in federal aid you’ve qualified for.

The rest will be done through the school’s financial aid office. Before you receive the money, you’ll have to take an entrance counseling course and sign a Master Promissory Note (MPN).

Kantrowitz says that parents and students should “File the FAFSA every year, even if you got nothing other than student loans last year. Subtle changes, such as the number of children enrolled in college at the same time, can have a big impact on eligibility for need-based financial aid.”

On a more general note, Kantrowitz also advises that “Students and parents have a tendency to overestimate eligibility for merit-based aid and underestimate eligibility for need-based aid.” So don’t be surprised if you qualify for more in federal funding than you originally thought!

No matter what you think about your current financial status, you should be filling out the FAFSA. There’s no argument to be had.

The problem with private loans

Private student loans should only be taken out as a last resort to finance your education. You should look to scholarships, grants, work study, federal loans, and paying costs out of pocket before you turn to a student loan from a private lender.

As we discussed earlier, the average interest rates for federal loans are much lower than the average rates for private loans. Plus, some private loans come with variable interest rates. This means that the rate can go up, increasing the amount of interest you’re accruing and the amount of money you ultimately have to repay.

The payment terms for private loans are much less flexible (and far less generous) than the payment terms for subsidized federal loans. With a private loan, you probably aren’t going to see a period where the lender is paying your interest for you—even when you’re currently enrolled in school.

And whereas you don’t have to pay back a federal loan until six months after you’ve graduated, left school, or changed to half-time status, you’ll likely have to make payments on your private loans while you (or your child) is still in school.

While federal loans are administered through your school using the FAFSA, private loans usually have to be applied for directly with the lender. (Some lenders will use your FAFSA application.) These loans might require a credit check and, in many cases, will also require a cosigner.

So if you’re the parent of a kid applying for college, your credit score could affect their chances of securing a private loan. (If the majority of the loans you take out are bad credit loans or no credit check loans, this will certainly be an issue.) Furthermore, by co-signing the loan, you are promising to pay it back if for some reason your kid isn’t able to.

Lastly, there are various ways in which federal student loans can be forgiven, i.e. the rest of your balance is written off. Private loans? Not so much.

(Read more about student loan forgiveness on the OppLoans blog.)

Any kind of loan comes with a lot of risks, but the private student loans might be a bit too risky to, well, risk it.

How much student debt is too much?

There’s a reason why student loans are considered to be “good” debt. By getting a college education, you are increasing your future earning power, which means increasing your overall wealth. Even though you’re taking on lots of debt to pay for college, what you’re really doing is making an investment in your future.

This doesn’t change the fact that this “investment” is getting paid for with debt. And, with any kind of debt, there comes a point at which you’ve taken out too much of it. An increase in your future earning power won’t seem so great if you’re filing for bankruptcy by the time you’re 30.

So how much is too much?

As with most things in life, the answer will vary. However, Kantrowitz has some great “best practices” to follow when assessing your student debt load:

“Aim to have total student loan debt at graduation less than your annual starting salary, and, ideally, a lot less. If total student loan debt is less than annual income, you should be able to repay your student loans in ten years or less.”

“Otherwise,” says Kantrowitz, “you’ll struggle to make the loan payments and will need an alternate repayment plan, like extended or income-driven repayment. These repayment plans reduce the monthly payment by stretching out the term of the loan to 20, 25 or even 30 years.

“That means you’ll still be repaying your own student loans when your children enroll in college.”

The amount of debt that’s reasonable to take on is going to depend on your future career path. There’s a reason that medical and law students are comfortable accruing a lot more debt to get their graduate degrees (even though that doesn’t always work out).

And there’s also a reason why the A.R.T. Institute at Harvard got in trouble with the federal government and has halted admissions for the next three years: An average student debt load of $78,000 for a degree in theatre arts is not at all reasonable.

Even here, Kantrowitz’s advice rings true. Higher paying careers might be worth the greater debt load, but keeping that load below your annual starting salary will leave you in good shape moving forward.

Scholarships: Get them early and often

This the best way to pay for college. Hands down.

Why? Well, the great thing about scholarships is that they are not a loan. It’s money that’s just given to you. No worries about deferment periods, variable rates, and decades-long repayment terms. You get the money, you pay for your education, and you’re done.

(Lots of scholarships are dependent on you maintaining a certain GPA average. So, you know, make sure you do that as well.)

Kantrowitz is a big fan of scholarships, and he has a bunch of great tips for how to find them, how to apply for them, and how to manage your expectations:

  • “Start searching for scholarships immediately. There are scholarships you can win in younger grades, not just during your senior year in high school or after you are enrolled in college. The sooner you start searching, the fewer deadlines you’ll miss.”
  • “When using a free scholarship matching service, answer the optional questions in addition to the required question. Students who answer the optional questions tend to match about twice as many scholarships, on average, as students who answer just the required questions. The optional questions trigger the inclusion of specific awards.”
  • “Apply to every scholarship for which you are eligible. Winning a scholarship is a matter of luck, not just skill, so the more applications you submit, the greater your chances are of winning a scholarship.”
  • “Winning scholarships is part of your plan for paying for college, not the entire plan. Only about one in eight college students has won private scholarships and the average amount is about $4,000.”

And if you’re looking to apply for a scholarship right now, you should definitely check out the OppU Achievers Scholarship.

Every year, we award $2,500 to four different students who transform opportunity into results. That’s a total of $10,000 in scholarships given out annually! To learn more—and to apply—just visit our scholarship page.

Financing your college education isn’t easy, and we hope this post was useful. Let us know what questions you still have, and we’ll get you the answers you need!

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M_KantrowitzMark Kantrowitz is Publisher and VP of Strategy for, a free web site that helps students achieve their college dreams by connecting them with colleges and scholarships. Mark is a nationally-recognized expert on student financial aid, scholarships and student loans. His mission is to deliver practical information, advice and tools to students and their families so they can make smarter, more informed decisions about planning and paying for college. Mark is the author of four bestselling books about scholarships and financial aid and holds seven patents. He also writes extensively on student aid policy and has testified before Congress and federal/state agencies on several occasions. Mark serves on the editorial board of the Journal of Student Financial Aid, the editorial advisory board of Bottom Line/Personal, and is a member of the board of trustees of the Center for Excellence in Education.

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