The meaning of financial aid isn’t always clear to all families. In fact, many people believe that financial aid will cover the cost of college, but that’s not the cost for all. In my years of admission, I’ve seen situations where financial aid covered the cost of college in full, and I’ve seen situations where the only thing offered to students is $5,500 in student loans.
However, as a whole, undergraduates and graduate students received $240.7 billion in 2022-23 from all grants, federal loans, federal education tax benefits and federal work-study. The average aid per full-time equivalent (FTE) student in 2022-23 was $15,480 per undergraduate student and $28,300 per graduate student, according to the College Board.
Financial aid can seem like the most daunting hump in the getting-your-kid-to-college process. But what is financial aid, anyway? What does it entail? Don’t worry, it’s normal to be confused.
Let’s compare financial aid to baking a cake. The ingredients — scholarships, grants, loans, work-study and out-of-pocket funds — are combined to create a finished product: Your child’s final financial aid award.
Hang in there! Let’s dive in and learn more.
What is Financial Aid?
Financial aid, which you may understand, is aid provided to help cover the cost of your child’s education. Scholarships are a part of financial aid.
Financial aid can include both money that needs to be repaid and money that doesn’t need to be repaid. Financial aid can come from various sources, including federal and state governments, colleges or universities, private organizations and banks. Financial aid helps make education more affordable by reducing out-of-pocket costs for students and their families. It’s a wonderful thing and one of the best ways to pay for college!
Types of Financial Aid
What are the different types of financial aid? Let’s take a look at the definition, eligibility and some popular types of financial aid.
Grants
Grants are money that your child does not need to repay. Eligibility for grants varies, but they are often need-based and might come from your state or the federal government.
Popular grants from the federal government include the Pell Grant and the FSEOG Grant.
Scholarships
Scholarships differ from grants because they are typically based on merit or other specific criteria. However, like grants, your child does not have to repay scholarships. Scholarships are not necessarily awarded based on need (but they might be).
Loans
Your child must repay loans with interest. There are two different types of loans: federal vs. private loans, and the terms, interest rates and repayment plans depend on the type of loans your child takes on.
Direct Subsidized and Unsubsidized loans: The U.S. Department of Education (through the federal government) offers two kinds of Direct loans to students: Direct Subsidized loans, which are based on need. The government pays the interest on subsidized loans while your child is in school as long as they attend college at least part-time as well as after the first six months after they leave school. Direct Unsubsidized loans are not based on financial need, and interest accumulates right away on Direct Unsubsidized loans. Students can borrow anywhere from $5,500 and $12,500 in Subsidized or Unsubsidized loans depending on their year in school.
Direct PLUS loans: Parents, this one’s for you! Parents of undergraduate students can get Direct PLUS loans (also commonly called Parent PLUS loans) for students, but those pursuing a graduate degree can also get a PLUS loan. This is a federal loan that requires a credit check.
Private student loans:Private student loans come from private companies, like banks and credit unions. Private loans might have variable interest rates and cannot be consolidated with Direct loans. These loans (which are typically more expensive than federal student loans) include terms and conditions set by the lender. Private lenders want to see a credit score to qualify. Private loans may only come in a variable interest rate (instead of a fixed rate).
When deciding between federal and private student loans, learn as much as you can, and if your child can do so, avoid them. Learn about repayment fees, interest rates (such as variable or fixed), when repayment starts and the total cost of the loan, including interest. Learn about any interest rate reductions as well.
Work-study programs are federal programs. Money comes from the federal government and goes directly into your student’s wallet. Students must apply for a work-study job on campus, and jobs might include working in the cafeteria, admission office, academic office or more on campus. However, note that work-study programs are not automatic — students must proactively apply for a job and go to work in order to receive a paycheck.
Of the above options, grants and scholarships are free money. Work-study is not technically free money, because your child must put forth the effort to earn it. It also typically does not go directly toward tuition — most colleges and universities pay your child. They must put it toward tuition and fees themselves.
Who Qualifies for Financial Aid?
Anyone can qualify for financial aid, which is why it’s important to apply for it, even if you don’t think your child will “get anything.”
Factors that affect financial aid for students include financial and other general eligibility for financial aid requirements, including:
Financial need, including income
U.S. citizenship or eligible noncitizenship
Enrollment status
Special circumstances (such as for independent students and veterans)
Your student will eventually receive a financial aid award letter from all colleges they applied to. When the letter will arrive depends on the school.
This is the confusing part for many families, and rightfully so. Each school follows a unique process in terms of dates, deadlines, procedures and awards. They even follow a different process for how they display your child’s aid! Your child might receive a financial aid award letter from various schools at different times of the year.
The amount of aid offered can cover up to the full cost of attending college. It will be broken down into three categories: free money they don’t have to pay back, earned money (typically work-study) and borrowed money (either from federal or private student loans).
It’s important to understand every aspect of the various financial aid awards and how they’re packaged, because it might be different compared to other financial aid awards your child receives.
There are several steps your child can take to get need-based or merit-based aid.
1. Apply for admission.
Your child can’t get scholarships from colleges until he or she applies. What type of admission does each college have? Rolling admission? Early decision? Early action?
It’s important to know each admission type, ensure your child follows all directions and applies well ahead of the deadline. Applying incorrectly (or late) could also directly affect your child’s financial aid opportunities.
2. Ask colleges about scholarships.
All colleges post information about scholarships on their websites. To get a full understanding of what a school offers, it’s a good idea to make contact with the admission office at each school. Colleges and universities can’t post every single scholarship they offer on their websites. Those lists are long!
For example, an alumna could have donated a scholarship for red-headed students education majors who like to knit. (Okay, that could be an exaggeration.) But there are dozens of scholarships that you might not know about unless you take the time to turn over every single stone at a particular college.
You probably want your child to apply for every bit of scholarship money possible. That means doing some extensive research online, in your community and through your school counselor’s office. There’s no one way to piece together the scholarship opportunities available to your kiddo. You can search in the following places, according to the U.S. Department of Education:
The financial aid office at the colleges your child plans to attend
Your child’s school counselor
Scholarship search tools — but make sure they’re valid
State grant agencies
Library reference section
Foundations, religious or community organizations, local businesses, civic groups
Organizations related to field of interest
Ethnicity-based organizations
Your employer or your kids’ employers
Pro tip: Ask colleges whether they offer scholarship competitions. Many do, and it’s a great way to earn more scholarship money.
4. File the FAFSA and (if required) the CSS Profile.
It’s important to file the FAFSA even if you think your child won’t qualify for anything. If the college requires the CSS Profile, complete that as well.
Two of the best ways to receive financial aid include filing the Free Application for Federal Student Aid (FAFSA), and if the schools your child is considering require it, the CSS Profile.
FAFSA Overview
The FAFSA is just like it sounds — a free application you file to determine whether your child can receive federal financial aid in the form of federal grants, loans and work-study. Colleges and universities also use the FAFSA to determine how much aid to award your child.
To complete the FAFSA form, all contributors (your student, you and your spouse if you are no longer married to your child’s other parent) must create a StudentAid.gov account using their FSA ID, ensuring their name and Social Security number match exactly. Once you gather necessary documents like tax returns and financial records, dependent students must include parent information, and you must accurately reflect marital or financial status changes. You and your child can sign and submit the form only after all contributors have completed their sections, with confirmation provided via email.
You can typically file the FAFSA on October 1, but recent lags in the new FAFSA simplification (which made the FAFSA shorter) have pushed out the FAFSA to December 1. You can still sign up for an account prior to December 1.
Should you file the FAFSA, even if you think your child won’t “get” any aid from it?
Yes! You must also file the FAFSA every academic year your child is in school or they won’t qualify for additional federal financial aid (including renewable aid they received the previous year). It’s usually easier to renew the FAFSA because the FAFSA stores your personal and demographic information.
CSS Profile Overview
The CSS Profile is also a free application, but it differs from the FAFSA. The CSS Profile is for institutional aid, not federal aid, and it asks more detailed questions, such as the net worth of small family businesses, home equity, medical expenses and more. It also asks you questions that do a deeper dive into your child’s income and assets.
You won’t pay anything for the CSS Profile if you make under $100,000 per year, if your child qualifies for an SAT waiver or if a student is an orphan or ward of the court under age 24. If you don’t qualify, submitting your CSS Profile to one college costs $25, and additional reports cost $16 each.
Not every school requires the CSS Profile, so check the list of participating institutions to learn more about whether the schools your child is interested in require the CSS Profile. The financial aid application process definitely lengthens when you file both the FAFSA and CSS Profile, but they can both help your child qualify for both federal and institutional aid.
5. Compare financial aid awards.
You’ve applied to several schools, filed the FAFSA, auditioned or interviewed for scholarships and attended scholarship events. Next, you’ll receive financial aid awards from schools. Sit down and compare them.
Be sure you do an apples-to-apples comparison. What does that mean? Let’s say you’re getting a $19,000 merit-based scholarship from College X and a $17,000 merit-based scholarship from College Y. That doesn’t mean that it’s necessarily cheaper to go to College Y.
What’s the full price for each? Figure that out, then subtract the amount of financial aid you’re awarded from each college to see which is cheaper.
Many families wonder if they’re doing “the right things” when they look into financial aid, so here are some of the most common financial aid mistakes to keep in mind:
Not applying early enough: Your child can start applying for financial aid early. In fact, it’s never too early to apply for scholarships! (My daughter received scholarships in fifth and sixth grade and I still look for opportunities all the time.)
Believing the FAFSA will cover everything: One of the most common FAFSA mistakes is thinking filing the FAFSA will take care of the full college bill. Filing the FAFSA does not mean it will cover all your child’s college bills. In some cases, the FAFSA will only offer federal loans. Don’t make the mistake of thinking that your ticket to financial aid involves filing the FAFSA, because it likely won’t take care of everything.
Not exploring all available aid options: Leave no stone unturned in your quest to look for available aid. This means creating a robust plan to look for scholarships, looking into merit-based scholarships and more.
Overlooking school-specific aid: Ensure you understand everything you need to do to apply for school-specific scholarships and other types of aid at each institution your child’s considering. For example, if a school offers a presidential scholarship, ensure your child knows how to apply for it if they qualify.
Learning how to avoid financial aid errors is one of the most beneficial things you can do for your student, and it can seem tricky because every school does things just a little differently.
Financial Aid Myths Debunked
You’ve heard the financial aid myths, like “only low-income students qualify for financial aid,” (ridiculous!) so let’s go over some of those. Steer clear of these dangerous ideas!
1. Only low-income students qualify for financial aid.
REALITY: Students of all income levels qualify for financial aid, whether it is merit-based, financial-based or other types of aid. Financial aid eligibility is based on various factors, not just income. Many families with higher incomes still qualify for aid due to their specific financial circumstances, especially due to the cost of attendance at different schools.
2. Only students with excellent grades get financial aid.
REALITY: While good grades can help with merit-based scholarships, financial aid is primarily need-based. Students from various academic backgrounds can qualify for grants, loans, and work-study programs.My family earns too much money, so I won’t qualify for financial aid.
3. Private colleges are always more expensive.
REALITY: While private schools often have higher sticker prices, they also tend to offer more generous financial aid packages. In some cases, attending a private school can be more affordable than a public university.
4. Applying for financial aid is a one-time process.
REALITY: You need to reapply for financial aid every year because financial situations can change.
5. Financial aid only comes in the form of loans.
REALITY: Financial aid can come in various forms, such as grants, scholarships, work-study and loans. Not all aid has to be repaid.
6. You should wait until you’re accepted to a college to apply for financial aid.
REALITY: It’s important to apply for financial aid as soon as possible. Most schools have deadlines, and aid is often distributed on a first-come, first-served basis.
7. Only U.S. citizens can receive financial aid.
REALITY: Many non-citizens, including permanent residents and eligible non-citizens, can qualify for financial aid. Some states and colleges also offer aid to undocumented students.
8. Scholarships are only for star athletes or high academic achievers.
REALITY: Scholarships are available for a wide range of criteria, including community service, hobbies, unique experiences or even being left-handed! Opportunities exist for so many different types of students!
9. Parent savings in a 529 plan will prevent financial aid eligibility.
REALITY: While savings in a 529 plan are considered in financial aid calculations, they have a relatively small impact compared to income. Most families are better off saving for college than relying solely on financial aid.
10. Financial aid packages are non-negotiable.
REALITY: In some cases, you can appeal a financial aid decision. If your family’s financial situation changes or if you receive a better offer from another school, you may be able to negotiate for more aid.
Maximize Your Child’s Financial Aid Opportunities
Understanding how this process works is the best way to establish as much control and your choices for financing college.
Most importantly, financial aid can come from a variety of sources: federal and state agencies, colleges, high schools, community organizations, foundations, corporations and more. Do everything you can to learn more about all your child’s opportunities and how it will help them in the future.
FAQs
What is financial aid and what does it do?
Financial aid can help your child tackle the costs of college. It comes in a wide variety of forms, and it’s truthfully like a puzzle you can put together to help pay for college. Whether it comes in the form of scholarships, grants or a small amount of loans, when put with the money that comes out of your pocket, it can make a huge difference in your child’s life.
Do you pay back financial aid?
Financial aid in the form of a loan must be paid back. You must repay federal loans after you graduate or stop attending school, with a grace period of six months after finishing school. Your child must also repay private student loans. Your child doesn’t need to repay other forms of financial aid, such as scholarships and grants.
Is all financial aid free money?
No, financial aid is not all free money. It includes loans, which your child must repay. For example, if your child receives federal student loans, they will have to repay them typically within six months after graduation.
Have you ever compared the tuition cost differences between in-state and out-of-state schools?
Did you gasp out loud when you saw out-of-state costs?
Yep, yep. It’s often thousands of dollars more expensive to go to an out-of-state university compared to an in-state university, and it’s because families don’t pay for these out-of-state institutions through their taxes, so their education costs are not subsidized and they receive higher costs.
It often makes students’ decisions easy. If your child’s comfortable with the idea of going to the flagship university in your state, he might think, “It’s cheaper, it’s close to home. Sign me right up.”
Should you migrate to your in-state university? Well, that depends! Don’t discount your neighboring states — and know a few things before you jump on the local state university bandwagon. Here’s what to know and how to get in-state tuition from out of state.
What is In-State Tuition?
In-state tuition refers to the lower cost of attending a public college or university for students who are residents of the state where the institution is located. This reduced rate is offered because public institutions receive state funding to help cover the cost of educating students who are from that state. To qualify, students usually need to meet specific residency requirements, such as living in the state for a certain period (typically 12 months) before enrollment, or having parents who are state residents.
In-state tuition is generally much more affordable than out-of-state tuition, which is the rate charged to students from outside the state. State governments subsidize In-state tuition, making it more affordable for residents.
What is Out-of-State Tuition?
Out-of-state tuition refers to the higher cost that students pay to attend a public college or university in a state other than the state where they have legal residency. This fee structure applies to students who do not qualify as residents of the state where the institution is located.
Out-of-state residents are considered non-residents and do not qualify for in-state rates. Out-of-state tuition might be two to three times more than in-state rates. This is because non-resident students do not contribute to the state’s tax revenue, which helps subsidize public universities. Some states have agreements, or exchange programs, that offer reduced out-of-state tuition rates to students from neighboring states.
Many students try to qualify for in-state rates or seek financial aid and scholarships to mitigate the costs, which we’ll discuss below.
How to Get In-State Tuition if You Live Out of State
Getting in-state tuition while living out of state can significantly reduce college costs. Here are several strategies your child can consider for how to get in-state tuition out of state.
Establish Residency
Establishing residency is one of the most straightforward ways to get in-state tuition. Residency requirements vary by state and university. Living in the state for a certain amount of time is one common way to establish residency.
Move to the state early: Many states require students to live in the state for at least 12 months before establishing residency. Your child can prove residency with an apartment lease, utility bills or vehicle registration form, for example.
Prove financial independence: Your child can show financial independence to prove they don’t rely on out-of-state parents for support, which can involve having a full-time job, filing state taxes and paying rent or a mortgage in the new state. Your child may need to show employer proof as above or show proof that he pays taxes in that state.
Driver’s license and voter registration: Encourage your child to obtain a state driver’s license, register their vehicle in the state and register to vote. They may also want to consider having other evidence to prove residency, such as utility bills in their name, employment records or state income tax returns.
Be aware of rules: Residency requirements vary by state, so you’ll need to review specific policies at your child’s college. Also ensure your child will meet the residency requirements well before any deadlines, typically at least a year before they intend to start classes.
Tuition Reciprocity Programs
Some states have agreements that allow students from neighboring states to attend school at reduced tuition rates (not always full in-state tuition, but lower than out-of-state rates). Many universities offer regional markets and reciprocity agreements, meaning colleges or universities offer students in different states in-state or reduced tuition for students who live in the same region.
Here are a few tuition reciprocity programs that might be open to your child, depending on where you live:
Western Undergraduate Exchange (WUE): WUE enables students from one of 16 Western Interstate Commission for Higher Education (WICHE) states and territories in the Western U.S. to enroll as nonresidents in 160+ participating public colleges and universities.
Midwest Student Exchange Program (MSEP): Applies to several Midwest states, including Indiana, Kansas, Minnesota, Missouri, Nebraska, North Dakota, Ohio, and Wisconsin.
New England Board of Higher Education (NEHBE) Tuition Break: Tuition Break covers New England states, providing savings for residents of the following six states: Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont, and for colleges that participate.
Academic Common Market (ACM): For students in southern states pursuing programs not available in their home state, the ACM allows students in southern states to enroll in out-of-state public universities at in-state tuition rates if the program they are interested in is not offered by their home state. States include Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, Tennessee, Texas, Virginia, and others. Students must meet residency requirements in their home state and gain acceptance into the qualifying program at the partner institution.
Generally, the process involves checking your eligibility (such as state residency requirements and participating universities), majors eligible, GPA, application and other school requirements. Finally, you’ll apply directly to the school to let them know you’re applying using the tuition reciprocity program.
University-Specific Programs
Some universities offer their own discounted tuition or in-state tuition rates for out-of-state students with certain qualifications, such as meeting merit-based scholarship requirements, athletic scholarships or legacy programs (where alumni children qualify for in-state tuition).
Check into the options available to your child based on your own alumni status! It could be a huge relief to your family, though I will recognize that many students don’t prefer to attend where “mom and dad” went to school! (That’s another topic for a different day.)
Military Service
Many states offer in-state tuition rates to active-duty military members, veterans or their dependents, regardless of where they live. If you’re a military member, check into this.
Attend a Border State School
Some states offer what’s called border-state tuition for residents of neighboring states. For example, Minnesota and Wisconsin have a tuition reciprocity agreement, allowing residents to qualify for in-state rates at public universities across state lines.
Special Circumstances or Exceptions
Some states allow students to take advantage of waivers in certain situations or exceptions. For example, those who have immigrant or refugee status may take advantage of these options, and so might dependent children of state employees or those enrolled in specific majors that benefit your state. The best way to find out about these involves asking the schools your child may be interested in attending. Ask many questions!
Online Programs
Many schools offer online degree programs at in-state rates for all students, regardless of where they live. However, each school and state has specific residency requirements for tuition, so review them carefully. Also, ensure that this is the right option for your child — it’s not the right fit for everyone, particularly if you think your child would thrive at an in-person institution.
Institution-Specific Waivers
Certain colleges and universities might also provide tuition waivers or reduced rates based on specific requirements, such as academic merit. Schools might also have special agreements for students from particular counties or areas of your state.
Our college used to offer an out-of-state scholarship for students who attended an out-of-state college in an effort to boost our out-of-state numbers. Offers like that may be achievement-based or merit-based, depending on differing schools’ requirements. Your best bet is to ask questions if your student’s looking into an out-of-state institution. Email or call an admission counselor at that school for more information.
Undocumented Students
Some colleges and universities may offer in-state tuition to undocumented students. Check into institutions your child is considering if they accept DACA recipients or those in similar situations.
26% of states offer in-state tuition to undocumented students
24% offer in-state tuition if the student meets statutory requirements
22% require undocumented students to pay out-of-state tuition
4% require undocumented students to pay international student rates
In 11% of states, policies differ by institution, and another 11% of states have no statewide policy on tuition rates for undocumented students. Alabama does not allow undocumented student enrollment by state law.
Of public four-year institutions:
25% of states offer in-state tuition to undocumented students
27% offer in- state tuition if the student meets statutory requirements
25% require undocumented students to pay out-of-state tuition
In 10% of states, policies differ by institution, and 6% of states have no statewide policy on tuition rates. Arizona offers undocumented students regional tuition rates, Missouri requires undocumented students to pay international student rates. Alabama, again, does not allow students to enroll by state law.
Some states extend in-state tuition to dependents of state employees or public service workers, such as police officers or teachers, even if they don’t meet other residency criteria.
Native American and Tribal Agreements
Some states have agreements to offer in-state tuition to members of federally recognized Native American tribes, regardless of residency.
Are You Eligible for Reduced Rates?
There are several exceptions to standard in-state tuition rates that may allow students to qualify for reduced rates, even if they don’t meet the usual residency requirements. These exceptions
Financial Benefits of Securing In-State Tuition
One of the best ways to look at an example of an apples-to-apples comparison. Let’s look at out-of-state tuition vs. in-state tuition rates for an education major at Texas A&M University.
First, the out-of-state costs for an education major at Texas A&M University for one semester:
Total estimated cost of attendance with tuition and fees
$30,429
Now, compare that cost with in-state tuition for one semester:
Category
Cost estimate
Room and board
$6,504
Books and supplies
$552
Travel
$1,066
Loan fees
$30
Personal expenses
$1,657
Total estimated cost of attendance with tuition and fees
$15,584.35
You can save a lot of money by attending college in state, so consider all your options. Your child should have excellent reasons for attending an out-of-state institution, particularly if they won’t get great scholarships to attend.
Consider All Your Options
Note: Out-of-state and in-state designations generally do not apply to private colleges, as their tuition rates are typically uniform for all students regardless of residency.
In fact, I always smiled when someone asked, “What’s the out-of-state cost at your school?”
Why? Because I had great news for families. The cost wasn’t any different for out-of-state students because I worked at a liberal arts college.
Liberal arts colleges and private universities charge the same price no matter where you’re from, and here’s why: Unlike public colleges and universities, private institutions don’t get funding from state governments. Therefore, private colleges and universities charge one tuition rate for all students, whether your child resides in the same state as the institution is located or not.
For example, if a liberal arts college is in Florida but your child lives in Minnesota, you’ll pay the same price whether you live in Florida or Minnesota.
Email or call an admission counselor at each college your student’s considering. it’ll make you feel more prepared to make some decisions about the college search, or it’ll at least give you a start in the right direction!
FAQs
Check out a few frequently asked questions that might still be on your mind.
Will FAFSA cover out of state tuition?
Out-of-state students pay higher tuition and fees than in-state students. It’s difficult to predict whether you’ll ultimately pay more. Note that most out-of-state students will have a gap between the cost of tuition and fees and the amount of aid they’ll receive, so ensure you make the right decisions for your family so you’re not swamped by federal student loans or private student loans.
How do people afford to go to college out of state?
If your child really wants to attend a particular college out of state, reach out to the financial aid office to learn more about the full costs. Merit or need-based aid may cover some of the costs.
What are the cons of going to college out of state?
The largest disadvantage of attending an out-of-state college is that the costs are higher than in-state fees. However, some states offer discounts to students in several different ways, which we discuss in the article above.
Here’s how to get rid of student loans: Repay them yourself. No “magic plan” will make them go away faster than you can actively repay them on your own — not even government plans.
Naturally, you might be in a hurry to get rid of this debt as soon as possible. But what’s the best way to get the job done? Let’s discuss.
Why Income-Driven Repayment or Federal Programs Aren’t the Answer
Many people assume they can take on loans as part of financial aid and wait to enter into a repayment plan after graduation. They assume they’ll sit happy until everything gets forgiven at the end, as in the example of income-driven payment plans. (Your payment is based on your income, and you’ll continue to pay on them for 20 or 25 years until forgiveness swoops in to save the day.)
But ultimately, you may pay more over time if you rely on federal forgiveness programs, so those programs aren’t the answer, because the standard repayment plan is just 10 years. Why wait for 20 to 25 years? (Note that it’s completely understandable that many people have situations that cause them to need to have one job only — circumstances might prevent them from hustling or handling a second job.)
However, we need to keep the end goal in mind: getting rid of student loan debt. And note that learning how to get rid of student loan debt without paying doesn’t work. You can’t shake off student loans, and you might find yourself in a position of having your wages garnished to pay for student loans. You don’t want to be in that position, do you?
No! So pay attention to what’s going on with your loans and make a plan to pay them off. No more regrets about how you spent way too much money on room and board, how you spent so much on pizza when you lived in off-campus housing, or that you should have gotten in-state tuition. No more regrets. Now it’s time to focus on paying it off.
Here are the real ways to learn how to get rid of student debt. If you’re at the beginning of your journey, look into how student loans work.
Pay Extra Toward the Principal
There are a few parts that make up your student loans: the principal balance, or the amount you borrowed. It also includes interest, or what you’ll pay for borrowing the loan, and the fees the lender charges as well. You must make at least the minimum amount payment on your student loans.
Paying extra toward the principal will help you pay off your loans faster. The more you pay, the less interest you’ll owe. A student loan payoff calculator can tell you how quickly you’ll pay off your student loans and how much overall interest you’ll save over the life of your loan.
Here’s an example of how paying off student loans early can save you money with a $30,000 student loan and a fictitious interest rate of 5% per year:
Loan Amount: $30,000
Interest Rate: 5% per year
Loan Term: 10 years (120 months)
Monthly Payment: $318.20
Regular Repayment (10 Years):
Total Interest Paid: $8,184.24
Total Amount Paid: $38,184.24
Early Repayment (5 Years):
Monthly Payment: $566.14
Total Interest Paid: $3,968.08
Total Amount Paid: $33,968.08
Savings by Paying Off Early:
Interest Savings: $4,216.16
Time Saved: 5 years
By increasing your monthly payment and paying off the loan in five years instead of 10, you could save over $4,000 in interest. This example shows how even small extra payments can lead to significant savings and financial freedom sooner.
Make More than the Minimum Payment
One of the best ways to pay off your student loans is to make more than the minimum payment. Once you determine your budget (how much money you have coming in and going out) you’ll know exactly how much extra money you have in cash at the end of the month. If you can kick in just $50 extra at the end of the month, that’s okay — it’s better than nothing! If you can double your student loan payment, that’s amazing.
Don’t worry about how little you’ve increased it as long as you do something to increase your payment each month. As you receive raises and bonuses, you can consider upping your minimum payment. Some people also elect to get a side hustle to raise your minimum payment.
Here are some ideas:
Round up payments to the nearest $10 or $50
Make bi-weekly payments instead of monthly
Use windfalls like tax refunds or bonuses for extra payments
Allocate a portion of any pay raise towards extra payments
Apply extra income from side gigs or overtime
Cut discretionary spending and redirect savings to payments
Pay extra towards the highest-interest debt first
Use cashback rewards or rebates to make additional payments
Avoid adding new debt to maximize repayment efforts
Make additional payments directly after receiving your paycheck
Get on a Budget
Get on a budget. If there isn’t another phrase greeted by a louder round of groans, I don’t know what it is. Budgeting might seem like a huge bummer to a lot of people, but it doesn’t have to be, especially if you’re meeting your goals at the end of the month.
One of the best ways to get on a budget is to consider using a budgeting app. However, you don’t have to do that — if you’re disciplined, you can create a budget all on your own and stick to it, even if it’s in a simple spreadsheet.
There are five main steps to getting on a budget:
List your income. Tally up everything you make, including any side hustle money that you earn.
List your expenses. How much are you spending per month relative to the amount you earn? If you’re spending more than you earn, that’s a quick sign that you need to start watching your money.
Subtract your expenses from your income. What’s left over? How much money do you have left? Are you spending more than you earn?
Track everything coming and going. Keep track of your transactions so you know exactly how much you can budget per month. You may even have different budget categories, like groceries, clothing, etc. Keep in mind the important things on your list, like setting aside money for retirement and an emergency fund.
Make a new budget each month. Budgets can be fluid, which is a beautiful thing. You may want to challenge yourself to save more than you had last month, or put more toward your student loans than you did the month before.
Cut Spending
Can you cut your spending? Chances are, there’s something that you don’t need. Here are some ideas you can cut out:
Extended warranties
Gym memberships
Premium cable packages
Bottled water
Designer clothing
Name-brand medications
Banking fees
Luxury car features
Subscription boxes
Fancy coffee
After you get on a budget, you might consider searching for these items that you regularly spend money on. Who needs ’em? You don’t, especially when you’re trying to get rid of student loans.
Pay While in College
Paying on your loans while in college: Is it possible? Yes, and you may want to consider that approach if you have an unsubsidized federal loan. Unsubsidized loans means the government doesn’t pay for your loan while you’re in school, unlike subsidized loans. If you can tackle some of your costs while you’re a student, you can consider this possibility. Doing so may help you reduce your overall debt, reduce stress after graduation and give you a head start on paying for college.
If you’re still in school, look into a tuition payment plan to help you — it can break up the costs.
Increase Income
How might you increase your income? Can you get a side gig in the very popular gig economy? You might consider:
Freelance writing
Rideshare driving
Pet sitting/dog walking
Virtual assistant
Graphic design
Tutoring
Photography
Delivery driving
Social media management
Handyman services
House cleaning
Online surveys
Event planning
Blogging
Babysitting
Transcription services
Dropshipping
Personal fitness training
Freelance web development
Selling handmade crafts
Or what about a second job? If you have the energy to work two (or even three) jobs, it would be well worth it to pay off your student loans faster. Consider the following:
Retail associate
Bartender
Restaurant server
Call center representative
Delivery driver
Warehouse worker
Customer service representative
Administrative assistant
Security guard
Hotel receptionist
Uber/Lyft driver
Bank teller
Personal care aide
Janitor
Cashier
Night auditor
Fitness instructor
Receptionist
Freelance designer
Landscaping assistant
Or you can ask for a raise at your existing job, of course. Once you make a decision about how you’ll increase your income, you can put any extra hard-earned money toward your debt. It’s a fantastic way to get out of debt much more quickly than you might have been able to do previously.
Refinance Only if it Makes Sense
Refinancing means replacing your existing loans (federal, private or both) with a private loan. Refinancing doesn’t reduce the amount you owe — it changes your loan in some way so you owe less over your loan term. These are the ways it can change your loan positively:
Give you a shorter repayment period: Refinancing a loan can result in a shorter repayment period, which allows you to pay less interest over time. However, it’s important to note that with a shorter repayment period, it’s likely that you’ll have to make higher monthly payments on your student loan debt.
Lower your interest rate: Getting a lower interest rate is one of the biggest benefits of refinancing, because you can save money over your loan term if you have a lower interest rate. For example, if you owe $30,000 on your student loans at 7% and a term length of 20 years, you’ll pay more than $26,000 in total interest over the course of the loan. If you refinance to a 5% interest rate and keep the same 20-year term, you’ll save around $8,000 in interest.
Reduce your monthly payments: You can also lower your monthly payment through a refinance. However, it also increases your loan term, and a longer loan term means you’ll end up paying more in interest over time.
The borrower requirements generally vary by lender, but you generally must have good credit with an established credit history, stable income, a degree from an accredited college or university, and a certain amount in student loans.
Shop around with a few different private loan lenders to see if a refinance makes sense for you.
Don’t Bank on Government Plans
So much has been said about the benefits of sticking to government plans, like loan forgiveness programs or deferment or forbearance options. However, it’s a much better option to simply pay off your student loans yourself, as we’ve discussed. But why, exactly?
Here’s exactly why: Let’s take Public Service Loan Forgiveness (PSLF) as an example. You must make 120 qualifying monthly payments on your student loans and work for a qualifying employer (such as a government or nonprofit organization) to qualify for PSLF.
In other words, you must continue making payments for 10 years, plus you might give up on more beneficial routes of employment, including more lucrative job opportunities. (However, it is important to note that you can get certain forgiveness benefits if you work as a teacher, for the military or as a health care worker.)
Why drag out your student loans longer if you could finish paying them off in five years instead of 10? You’ll save money by not dragging them out. Income-driven repayment plans can also affect you in the long run as well because you pay based on your earnings and family size.
Federal loans also allow you to temporarily pause your payments through deferment or forbearance if you face financial hardship, unemployment, or if you’re returning to school. You will still accrue interest while your loans are in forbearance, so you’ll owe even more money over your loan term while they’re in forbearance.
Need an example? Let’s break down an example of how an income-driven repayment plan can end up costing a student more money over time with actual numbers:
Loan amount: $50,000
Interest rate: 5%
Annual income: $40,000 to start, increasing by 5% per year
Family size: 1
With the Standard Repayment Plan:
Repayment term: 10 years
Monthly payment: $530 (fixed)
Total payments over 10 years: $530 x 120 months = $63,600
Amount added to original loan amount: $13,600
With PAYE Repayment Plan:
Years one through three: Monthly payments are income-driven. Let’s say the payments start at $200 per month.
Total for first 3 years: $200 x 12 months x 3 years = $7,200
Years four through six: As income increases, the payments rise to $350 per month.
Total for next 3 years: $350 x 12 months x 3 years = $12,600
Years seven through 10: Payments continue to rise as income increases further, say to $450 per month.
Total for final 4 years: $450 x 12 months x 4 years = $21,600
Total payments over 10 years (before forgiveness at 20 years) = $7,200 + $12,600 + $21,600 = $41,400
But here are the hidden costs. During the 10 years, interest accrues on the loan balance. In this example, the borrower’s monthly payments early on ($200, $350) may not cover the full interest on the loan, leading to the loan balance increasing over time (negative amortization).
Even though the borrower only paid $41,400 over 10 years, which seems like a savings compared to the standard repayment plan, here’s where the cost comes in: They could have paid off the loan faster under a standard repayment plan and avoided the extra accrued interest. By the time year 20 rolls around, how much would you have paid under the income-driven plan versus the standard repayment plan, or better yet, paying your loans off early?
It’s quite possible that you feel like you don’t make enough to pay off your loans, but consider getting a second job or side hustle instead of believing you have to get on one of the income-based plans.
Watch Out for Consolidation
Consolidation means taking all of your federal student loans and turning them into one loan with one interest rate. It may not be a good idea to consolidate your federal student loans because what happens if some of your federal loans have a lower interest rate?
Consolidation can also lengthen your repayment period, so you’ll likely pay more in interest over the years. In addition to that, outstanding interest on your consolidated loans becomes part of the original principal balance on your new consolidation loan, meaning interest might accrue on a higher principal balance than if you’d kept your loans divided.
Consolidation might also mean lower interest loans might become higher when you put them all together. Ask questions about what it’ll mean for your loans before you opt to consolidate.
Consider All Angles When Getting Rid of Student Loans
The message: You and only you have the power to learn how to get rid of student loan debt. Student loans won’t magically disappear, unfortunately!
Wondering how to get rid of private student loans, including how to get rid of Navient private student loans or private loans from another provider? The same principles above can apply to private student loans as well.
The biggest thing is to plug away at them, and even if you have a low interest rate, consider what having student loans hanging over your head will do for you. If you owe money, that entity will control your life until you pay it back.
We’ll take a look at a few frequently asked questions about getting rid of student loans below.
Can you get student loans wiped out?
Yes, in very rare situations, you can have your student loans discharged, but that doesn’t happen very often. But what does that mean, exactly? When your student loans are discharged, you won’t have to pay back some or all of your loans. You may also qualify for forgiveness after successfully participating in a government plan, such as PSLF.
However, in many situations, these programs prolong your student loan debt and cause you to pay more over time. And if you’re waiting for a fairy godmother to come and wipe out your student loans, dream on!
What happens if I don’t pay my student loans?
After a 30-day-late payment, your loan servicer will charge you a late fee up to 6% of the amount due. After 90 days of no payments, your servicer will report your loan as delinquent to the credit bureaus. You don’t want that, because it can affect your credit score, potentially preventing you from buying a house or even affecting your ability to get a job (some employers check your credit!).
How do you pay off student loans when you’re broke?
I get it — it’s so difficult to understand how you’ll even put food on the table sometimes. However, consider getting a side hustle or part-time job to set aside money for paying off loans. Ask your buddy if he needs extra help in his junk hauling business, or use your skills you learned in college to create a side hustle that you and only you can do. The sky’s the limit, so use your imagination.
Are you worried your child will graduate with crippling student loan debt?
Meet the family who cracked the code to debt-free college education and transformed their kids’ futures forever! With determination and strategic planning, they embarked on a dedicated scholarship hunt. From meticulous essay-crafting sessions to scouring for scholarship opportunities, they left no stone unturned.
And the results were staggering.
LaWanda Hanes mentors first-time single moms in Waxahatchee, Texas, and at her church.
“Nobody can afford college, but everyone can go,” LaWanda often says.
It’s one of her favorite phrases, and she repeats it often with the single moms she mentors, many of whom believe they can’t make college happen for themselves.
She, of course, mentors her own kids as well. Hanes and her husband, Thomas, vowed that their two children, Jasmine and Tre, wouldn’t face the same student loan burdens that they encountered after their own graduations.
“We decided our kids would not borrow for school,” LaWanda said emphatically.
No ifs, ands or buts.
The dream is coming true.
LaWanda and Thomas’ daughter, Jasmine, graduated with no debt. Jasmine went to college at University of North Texas for interior design and graduated in two and a half years. She went into the university with an associate’s degree through a dual-degree program.
Their son, Tre, is on his way to graduating debt-free with an engineering degree through the University of Oklahoma’s merit program. He’s currently in his third year of college.
The Spark for a Debt-Free Degree
The Haneses’ desire for their children to achieve a debt-free education grew out due to their own student loans.
“Our journey with our kids started with our journey to get out of debt ourselves. We have five degrees. [Thomas] has a bachelor’s and a master’s degree and I have a bachelor’s degree and two master’s degrees,” LaWanda said. “Fast forward 10 years, and we are 30 years old, with two young kids and $110,000 in student loan debt.”
They started with less debt, with about $75,000 to $78,000 to their names out of college. Some twists and turns required them to take deferment and unemployment, and they found themselves $110,000 in debt in no time, with both subsidized and unsubsidized loans. (The interest that built on itself didn’t help, either.)
The Payoff Day: The Very Best Christmas Present
LaWanda said her kids sacrificed just as much as she and her husband did. LaWanda said Tre and Jasmine had grown up understanding that there wasn’t a lot of money available to purchase “extra” things at the store. “They understood how hard it was for us to get out from under these student loans,” LaWanda said.
After one Christmas with few gifts, LaWanda said she and Thomas took their kids to the bank and gave each child $500. Both kids turned the money over to a loan officer.
The whole family felt like screaming with happiness. They were finally out from under their student loan debt burden.
Immediately after, LaWanda and Thomas took them to dinner at Red Robin, where everything the kids had asked for Christmas sat under the table. The excitement bubbled over so much that they actually did need to scream.
Their waitress heard the commotion and said, “I just want to know what’s going on here. It sounds like something amazing.” When she heard their story, the waitress almost jumped up and down alongside them — their excitement was infectious.
The Panic Moment
Early in high school, however, Jasmine worried that she wouldn’t be able to pay for college.
Turns out, Jasmine thought it was a money problem.
A worried LaWanda reassured her, but was firm. She told her daughter, “You have to go to college or have a skill set.” She added that the family had a 529 but said that the savings wouldn’t take care of everything. She informed Jasmine that the less they would have to pay out of pocket, the better.
Two Debt-Free Degrees: How They Did It
“We started junior year. Nobody told us we should start looking for scholarships earlier,” LaWanda said. If she knew she needed to look earlier, she would have.
Jasmine and LaWanda had a system — they met every Sunday about the scholarship plan for the week. LaWanda paid her kids $5 for every scholarship application they completed, but they had to write the essay. LaWanda agreed to put the packages together for them.
Jasmine put about 60 to 70 scholarships on her list, and Tre had about 30.
Jasmine had an interest in the hobby space, danced, sang and competed in softball. She was also a cheerleader. She looked into scholarships in all those areas, as well as local sorority and fraternity chapters, local banks, mom’s clubs and the chamber of commerce.
At a certain point, Jasmine had a system down so that all she had to do was tweak her essays to fit the scholarship. They had a color coding method on a spreadsheet — green was for anything not submitted, yellow indicated scholarships “in process” and red indicated “in danger of missing the deadline” or “denied.”
“Both of them got merit scholarships. People were just throwing things at us. Jasmine’s story was she got so much money in scholarships that the school ws sending us checks back!” LaWanda even said that the pastor of their church called Jasmine the “rich kid.”
“A lot of wins were local wins. We didn’t get a lot of national scholarship.We kept things more local and at church, people would send us stuff and just want to help us,” said LaWanda. She added that they both received $10,000 to $12,000 every year from churches in Dallas-Fort Worth and Oklahoma., which helped make up the bulk of their awards.
Their son’s path to engineering scholarships wasn’t quite as easy, but with perseverance and a little help from diversity and inclusion programs, he secured the funds needed to take care of college.
By the time it was all said and done, Jasmine went to college for free.
Financial Discipline for a Lifetime
But it wasn’t just about scholarships. LaWanda and Thomas instilled financial discipline from a young age, teaching their kids the value of budgeting and saving. Jasmine now has a paid-for car (in cash!) and the freedom to pursue her passions without the shackles of student loans.
From prioritizing scholarship applications to leveraging local resources, the Haneses prove that it’s possible to graduate without student debt.
Now that she’s out of school, Jasmine has noticed how her peers have begun paying back their student loans and struggle to make ends meet.
“She thanks us all the time that we helped her go to college without student loans,” LaWanda said.
So, if you’re ready to say hello to a debt-free future, join the debt-free revolution today! Get the exact steps in the College Money Tips debt-free degree checklist so your child can avoid loans.
Need-based financial aid: It’s one of these mystifying terms that admission offices throw around when you visit colleges. I can vouch for that — I worked in college admissions for 12 years.
There are many ways you can take care of college costs. You can pay for it all out of pocket; your child might earn a scholarship because of her violin-playing talents or other skills. Or your child might get need-based financial aid.
What is need based financial aid, exactly? It’s exactly like it sounds — it’s aid you receive based on your family’s financial situation. Or, in rare cases, it’s based on your financial situation if you are an independent student. Your grades, test scores or extracurricular achievements don’t factor in.
Key Takeaway
Colleges award need-based financial aid, determined by your family’s financial situation, upon filing the Free Application for Federal Student Aid (FAFSA). Colleges assess income-related answers to grant your child a financial aid award, comprising grants, scholarships, work-study and loans. Per the National Center for Education Statistics, over 85% of students receive financial aid, including need-based assistance.
Simple enough, right?
Right!
An Overview of Need-Based Financial Aid
Need based financial aid depends on several factors, such as income, assets and the cost of attendance at a particular institution. Examples of need-based financial aid include grants, scholarships, work-study programs and subsidized loans.
Types of Need-Based Financial Aid
Need-based financial aid comes in various forms, each designed to help students meet those. What qualifies for need based financial aid? Here are some common types:
Grants: Grants are financial awards your child doesn’t have to repay — yay! The government, colleges or private organizations often provide them. Need based grants examples include the Federal Pell Grant, Federal Supplemental Educational Opportunity Grant (FSEOG) and state-based grants. In other words, always say “yes” to grants if your child receives them on the financial aid award! However, check into the requirements for the grant. For example, your child may stop receiving it if they drop out of school.
Scholarships: Like grants, your child does not need to repay scholarships. (Scholarships should always prompt your family to celebrate!) Now, the tricky thing with scholarships is that your child may receive them due to financial need. Still, they can also earn them for non-scholarship reasons, including due to academic achievement, athletic ability, talents or other criteria. Many colleges and universities offer scholarships to help students afford tuition and other expenses.
Work-study programs: Students can work part-time jobs, called work-study, typically on campus, to earn money to help pay for educational expenses. Many people don’t realize that work-study is need-based, but it is! Your child’s wages earned through work-study are often subsidized, meaning the employer (usually the college or university) pays a portion of your student’s wages. (Note that your child will not receive the work-study money if they don’t sign up to work a job on campus!)
Subsidized loans: Subsidized loans are a type of federal student loan where the government pays the interest. In contrast, the student is in school at least half-time, during the grace period after leaving school and during deferment periods. They differ from unsubsidized loans because unsubsidized loans are not based on need. If you have to choose between subsidized and unsubsidized loans, choose subsidized!
Tuition waivers and discounts: Some colleges and universities offer need-based tuition waivers or discounts to students who demonstrate financial need. These waivers and discounts can significantly reduce the cost of tuition for eligible students.
Fee waivers: Fee waivers may be available for standardized tests such as the SAT or ACT and for college application fees. Students from low-income families may qualify for fee waivers to reduce or eliminate the costs associated with these tests and applications.
These are just a few examples of the types of need-based financial aid available to students. It’s a great idea to research all options and work closely with your child’s college’s financial aid office to determine the best package for their needs.
Need-Based vs. Merit-Based Financial Aid
You may have heard about something called “merit-based aid,” and it’s different from need-based aid, but how?
Merit aid (which can come in the form of scholarships, grants, tuition waivers or other awards) is awarded based on the student’s academic, athletic, artistic or other achievements rather than financial need. The merit aid awarded is determined by the student’s performance in standardized test scores, GPA, extracurricular activities, talents or leadership qualities.
Students may be automatically considered for merit aid based on their application for admission to the college or university, or they may need to submit additional materials or applications to be considered.
Who Qualifies for Need-Based Financial Aid?
Qualifying for need-based aid includes a few important requirements. Your child must demonstrate financial need, be a U.S. citizen or eligible noncitizen, and enroll in an eligible degree or certificate program at a qualified college or career/trade school.
How to Qualify for Need-Based Financial Aid for College
Students typically qualify for need-based aid by completing the FAFSA. However, they may qualify for need-based aid by filing the CSS Profile, another online application colleges and scholarship programs use to award non-federal institutional aid to students.
The FAFSA will ask questions such as:
What is your tax filing status?
What was your adjusted gross income?
How much did you earn from working?
What is the total current balance of your cash, savings and checking accounts?
What is the net worth of your investments?
What is the net worth of your current businesses and/or investment farms?
What were your total tax-deferred pension payments?
How much did you pay to your IRA or Keogh?
How much total child support did you receive?
What was your total tax-exempt interest income?
What were your total untaxed portions of IRA distributions?
What were your total untaxed portions of pensions?
What were your total allowances received?
What were your total veterans noneducation benefits?
What was the total of your other untaxed income or benefits?
What other money has been paid on your behalf?
This is just a short list of questions it asks (and yes, they are kind of a snooze-fest). However, the great news is that it takes less time than it has in the past due to the FAFSA Simplification Act put in place, which overhauled the processes and systems used to award federal student aid, starting with the 2024–25 award year.
This is a common question, by the way: Is FAFSA need based financial aid? The answer is no, it is the tool you use to get need-based financial aid.
How is Need-Based Financial Aid Calculated?
Yep, common question: How is need based aid determined?
Here’s how financial aid works: Submitting the FAFSA collects information about your family’s income and assets (as seen above). The information provided on the FAFSA is used to calculate your Student Aid Index (SAI), which is the amount the federal government believes you as a family can contribute toward education expenses.
What is the SAI?
The FAFSA now uses the SAI to measure your family’s ability to pay for college. It has done a few new things, including removing the number of family members in college from the calculation and allowing a minimum SAI of -1500.
With the introduction of the SAI, allowing a minimum of -1500 means that some students may have a negative SAI, indicating that they have very high financial need and may be eligible for additional financial aid beyond what was previously calculated using the EFC.
The SAI also signals separate eligibility criteria for Federal Pell Grants. The Federal Pell Grant should now reach more students with financial need.
Note: The SAI should have consequences for families with a small business. For the first time, parents who own companies with less than 100 employees will have to count the value of their business toward the financial aid calculation. You can find your child’s SAI on the FAFSA Submission Summary after you complete the form.
How Financial Aid Offices Use the SAI
The financial aid office at each college or university uses your child’s SAI to determine your child’s eligibility for need-based financial aid. They subtract SAI from the total cost of attendance to determine your financial need. The financial aid package includes grants, scholarships, work-study opportunities and federal student loans, all designed to help cover your financial need.
Each college or university may have its policies and procedures for awarding need-based financial aid, so the specific calculation methods and available aid may vary from institution to institution.
Does Your Child Have to Pay Back Need-Based Aid?
You’ll pay back financial aid if it’s a loan, but your child won’t have to repay grants, scholarships or work-study money. (Note that some grants may require repayment if your child doesn’t finish their degree or drops out midway through the semester.)
You don’t have to begin repaying most federal student loans until after you leave college or drop below half-time enrollment.
A repayment schedule will explain when your first payment is due, how many payments you’ll make, the frequency and payment amounts.
You might get a grace period, a set period after you graduate, leave school or go below half-time enrollment. You don’t have to repay your loan until after the grace period. The grace period gives you time to select your repayment plan. Not all federal student loans have a grace period. Interest will build during the grace period in all cases. Understanding the different types of bank accounts you might use to manage your finances can be helpful during this process.
How Does Need-Based Aid Affect College Affordability?
Need-based aid is crucial in making college more affordable for students from lower-income families and those with demonstrated financial need. Here’s how it affects college affordability:
Reduce costs: Need-based aid, such as federal Pell Grants and institutional grants, can significantly reduce out-of-pocket college costs. This can make higher education more accessible to students who might otherwise struggle to afford it.
Expand options: With need-based aid, your child has more options when it comes to choosing which colleges to attend. They are not limited solely to schools with lower tuition fees but can consider a broader range of institutions that may offer the programs and environment they desire.
Minimizing debt: By providing financial assistance upfront, need-based aid helps students avoid excessive student loan debt. This is particularly important for students from lower-income backgrounds who may be more vulnerable to financial challenges after graduation.
Early financial stability: Need-based aid enables students to focus more on their studies and less on financial concerns. Always a great bonus for parents, right? By minimizing the financial burden of attending college, students can start their careers on a more stable footing and work toward achieving other financial goals, such as homeownership, at an earlier stage in life.
Universal application: You must apply for financial aid, regardless of your perceived income level. Need-based aid programs often have eligibility criteria that extend beyond poverty lines. Many factors beyond income are considered when determining financial need.
How to Get the Most Need-Based Financial Aid Possible
Filing the FAFSA is the best way to get the most need-based aid possible. Be sure you know how much need-based financial aid you’re taking out and plan to pay it back when you’re through school.
Be intentional: Make less during the preceding years you know you’ll be filing the FAFSA
Don’t realize capital gains or take retirement distributions
Defer work bonuses
Decrease reportable assets
What to Do if Need-Based Financial Aid Isn’t Enough
Did you know you can get your child’s financial aid awards reevaluated if need based aid isn’t enough?
The process for requesting a reevaluation of aid packages varies among institutions but typically involves submitting a formal appeal letter to the financial aid office.
This letter should clearly outline the changes in financial circumstances and provide supporting documentation. You should:
Adhere to the institution’s deadlines and procedures for appeals, as missing deadlines could result in missed opportunities for additional aid.
Some schools may also require students to complete specific forms or participate in interviews as part of the appeal process.
Your child should follow up with the financial aid office to ensure their appeal is processed and to inquire about the expected timeline for a decision.
Documenting special circumstances is a critical aspect of the appeal process. It involves gathering relevant documentation to support the claims of financial hardship or unusual circumstances.
This documentation may include tax returns, pay stubs, medical records, statements from employers or any other paperwork that provides evidence of the changes in financial circumstances.
Students and their families should thoroughly document their situation and be prepared to provide additional information or clarification if requested by the financial aid office. Clear and comprehensive documentation strengthens the appeal and the likelihood of a favorable outcome.
Your Child Can Get Need-Based Financial Aid — Just Apply!
Now that you understand the need based financial aid meaning, do you intend to apply for need-based financial aid or are you asking, “Should I apply for need based financial aid?”
Yes, you absolutely should.
Even if you don’t think you’ll demonstrate financial need or meet the qualifications for need based financial aid, you should file the FAFSA anyway.
Though it’s financial aid based on income, you may be surprised at how the institutional aid equation comes through for your child. If you’re “just on the bubble” from one aid category to another, it is possible to benefit.
FAQs
Still have questions? Take a look at these questions and answers.
What is the difference between financial aid and need-based aid?
Financial aid encompasses all types of financial assistance available to students to help cover the cost of education, including scholarships, grants, loans and work-study programs.
Need-based aid refers to financial assistance awarded based on a student’s demonstrated financial need, including income, assets and the cost of attendance at a particular institution. While financial aid encompasses a broader range of assistance, need-based aid is specifically awarded based on financial need.
For example, merit-based aid is also financial aid but isn’t need-based. Need-based aid typically comes from filing the FAFSA, while you can get other types of need-based aid without filing the FAFSA.
What is a need-based financial aid example?
A subsidized loan is an excellent example of need-based financial aid because it is awarded to students based on financial need, as the FAFSA determines. Unlike unsubsidized loans where interest accrues while the student is in school, the government pays the interest on subsidized loans. In contrast, the student is enrolled at least half-time, during the grace period after leaving school and during periods of deferment.
Should I put “Yes” for need-based financial aid?
When you receive your child’s financial aid award, it’s up to you and your child whether you choose to “accept” need-based financial aid. You may have a hard policy of not taking loans, while you accept grants and scholarships. However, you may need subsidized loans to get through your child’s school years. Talk about it together.
When your child applies for financial aid through the Free Application for Federal Student Aid (FAFSA), they may experience a gap between the cost of the school and the financial aid they actually receive. A private student loan, which may come from an online lender, credit union, bank or other lender, may help cover the gaps that financial aid doesn’t cover.
We reviewed the best private student loans based on research on interest rates, repayment terms, other benefits and more. We’ll also go over the basics of private student loans, including how they work, the pros and cons between private and federal student loans, how students can maximize both federal and private student loans and more.
Best Private Student Loan Lenders
We compared dozens of private loan providers and chose the top five to feature here. According to our research, the best private student loans for students include:
Rating
Minimum credit score
APR (both fixed and variable)
Check rate
College Ave
5/5 stars
Mid-600s
3.99% –14.96%
SoFi
4.5/5 stars
Mid-600s
4.49% – 14.75%
College Finance
3/5 stars
Sallie Mae
4/5 stars
Mid-600s
4.50% – 15.33%
Earnest
4.5/5 stars
650
4.49% – 13.95%
How Do Private Student Loans Work?
Private student loans differ from federal student loans because they do not come from the government. Your child’s school may also be a direct loan institution, which means that the school may offer loans directly to borrowers. Ask your child’s school if it offers loans directly.
You can submit applications through lender websites and must include the following:
Information about your child’s degree or program
The school your child plans to attend
The amount of money you need to borrow (your child must have qualified higher education expenses at an eligible institution)
Personal and financial information
Cosigner information, if applicable
Your child may have to be the age of majority in your state of residence (if not, your child may need a cosigner) and be a U.S. citizen, permanent resident or non-permanent resident alien. Your child may also have to be enrolled at least half time in a degree-granting program.
Your child can borrow up to their school’s cost of attendance in private loans, minus other financial aid earned. Individual lenders may have limits for the amount of money your child can borrow.
Your child will face limits on federal student loan amounts. For example, dependent students may not qualify for more than $5,500 in their first year and no more than $3,500 of this amount may be in subsidized loans. Dependent undergraduate students run into an aggregate loan limit of $31,000; your child cannot get more than $23,000 of this amount in subsidized loans.
In contrast, the application process differs for private student loans versus federal student loans. You or your student must file the Free Application for Federal Student Aid (FAFSA) to qualify for federal student loans. Federal student loans come from the U.S. Department of Education through the William D. Ford Federal Direct Loan (Direct Loan) Program. Direct loans include Direct Subsidized loans, Direct Unsubsidized loans and Direct PLUS loans:
Direct Subsidized loans: Undergraduate students who demonstrate financial need may receive the Direct Subsidized Loan to help pay for college or career school. The federal government pays the interest on Direct Subsidized loans while you’re in school.
Direct Unsubsidized loans: Graduate and undergraduate students can tap into unsubsidized loans, which means that the government does not take care of the interest while you’re in school.
Direct PLUS loans: Parents of undergraduate students can help pay for cosmetology students’ education with a Direct PLUS loan. Parents will have to undergo a credit check.
Private student lenders may require you to make payments while you are still in school and can have variable or fixed interest rates. Federal interest rates are always fixed. This means that federal student loans may be more predictable when your child repays them.
Federal student loans typically carry lower interest rates than private student loans and private loans also cause you to lose out on income-driven repayment plans and other perks such as public service loan forgiveness, which means you do not have to pay your student loans after a certain period of time.
Federal vs. Private Student Loans
One of the best ways to compare federal and private student loans involves looking at the pros and cons of both. So, what are the pros and cons of federal vs. private student loans? Let’s take a quick look.
Pros of Federal Student Loans
Let’s take a quick look at a few benefits of federal student loans first.
Fixed interest rates: Federal student loans offer fixed interest rates. This means that when your child repays their loans, they know what interest rate to expect. Fixed interest rates never change, while variable interest rates change.
Payments not due while in school: Federal student loan repayment doesn’t begin until after you graduate, leave school or enroll in school below half-time.
Lower interest rates: Your student will typically pay lower interest rates for federal student loans compared to private student loans. However, it’s a good idea to compare several options to check on the costs.
Subsidized options: You can qualify for subsidized federal student loans, which means that the government will pay the interest while your child attends school.
Tax deductible interest: Interest may be tax deductible on a federal student loan.
Repayment plans: You may choose from several repayment plans for federal student loans, including income-driven repayment plans. Also note that if your child decides to pay off a student loan early, they won’t pay a prepayment penalty.
Loan forgiveness and consolidation: Your child will have many federal loan perks, including forgiveness (in which they may not have to pay back loans, such as if they choose to work in public service) and consolidation, which means combining at least two loans into one loan and getting a new interest rate.
Cons of Federal Student Loans
What are the downsides of federal student loans? You may have heard that you should take out federal student loans before private student loans, but you should still consider all angles of federal student loans before you borrow.
Borrower limits: Your child cannot borrow an unlimited amount with federal student loans. As your child becomes a first-year through fourth-year college student, they can borrow progressively more. They will face an aggregate loan limit that they cannot go over for both undergraduate and graduate school.
No subsidized loans for graduate students: Graduate students cannot tap into Direct Subsidized loans, which means the government will not pay the interest while your student is in school. Graduate students must also pay a higher interest rate for their federal student loans.
Not all institutions participate: Not all educational institutions that distribute Title IV student aid funds, which means that your child’s school may not offer federal student loans.
Hard to discharge: It is extremely difficult to discharge federal student loans. If your child defaults or cannot repay federal loans will not get away from them through bankruptcy. In short, it’s really hard to discharge student loans, including through Chapter 13 or Chapter 7 bankruptcy.
Pros of Private Student Loans
The benefits of private student loans include the following:
Fills in the gaps: Private student loans can fill in the gaps between the sticker price of a college, financial aid your child receives and federal student loans. When your child has unmet need, private loans can take care of the rest.
Unlimited borrowing: Generally, you can borrow up to the cost of attendance in private student loans, minus financial aid.
Tax-deductible interest: Interest may also be tax deductible on private student loans.
May have lower interest rates: You may find that certain private loans have lower interest rates than graduate and parent loans, particularly with regard to graduate and parent loans through the Department of Education.
Cons of Private Student Loans
The downsides to private student loans include:
No access to federal protections: Your child will not have access to federal income-driven repayment or loan forgiveness options with private student loans. They also wouldn’t be subject to orders from the federal government to cancel student debt.
Based on creditworthiness: Qualifications for private student loans are based on creditworthiness, which means that you or your student must undergo a credit check. Lower credit scores combined with lower income can result in a higher interest rate. Your credit score is a three-digit number that ranges from 300 – 850 and summarizes how well you have paid back debt in the past.
No federal subsidies: The federal government will not pay the interest on a private student loan like the federal government does with a subsidized student loan.
How Are Private Student Loan Interest Rates Determined?
If you take out a private student loan, you must repay it with interest. Private student loan interest rates are based in part on your credit score (as a cosigner) or your child’s credit score. The higher your credit score, the lower your interest rate may be.
Your child may have the option for a fixed or variable private loan interest rate. A fixed interest rate stays the same throughout the life of the loan, while a variable interest rate changes depending on an underlying benchmark index rate. Variable interest rates are usually based on the Secured Overnight Financing Rate (SOFR) index rate. As the interest rate changes, your monthly debt payment could go up and/or down due to the changes in the index rate. Interest rates typically include the base rate, the lender’s policies and you or your child’s credit history. To break it down even more, they are based on fixed margin, or the lender’s decision about your ability to repay the loan — this part of your loan doesn’t change. The variable part of the interest rate changes, and that part is based on the interest rate index.
Ask private lenders about the total cost of the variable interest rate you’ll pay and also compare these rates to current federal student loan interest rates, currently first disbursed on or after July 1, 2022 and before July 1, 2023.
Loan Type
Borrower Type
Fixed Interest Rate
Direct Subsidized loans and Direct Unsubsidized loans
Undergraduate students
4.99%
Direct Unsubsidized loans
Graduate or professional students
6.54%
Direct PLUS loans
Parents and graduate or professional students
7.54%
Note that private student loans list an annual percentage rate (APR), the annual cost of a loan to a borrower, including fees like loan origination fees. The interest rate doesn’t include these fees. You should always look at the APR of private loans, not just the interest rate.
How Can Students Maximize Both Federal and Private Loans?
Students can take advantage of both federal and private student loans by filing the FAFSA online at fafsa.gov or complete a FAFSA PDF and mailing it in. You can also apply for private student loans on a lender’s website.
Students can generally borrow up to the cost of attendance for private student loans, minus financial aid. The first step involves filing the FAFSA, which you can do in a few simple steps (you can do it for your student or your student can do it by themselves):
First, create an account with a username and password, called an FSA ID, and have the following information handy:
Social Security numbers for you and your dependent student
You can save time by using the IRS direct retrieval tool (DRT), which automatically transfers tax information onto the FAFSA. Note that you can’t see the exact data for security purposes; you’ll see the words “transferred from the IRS” in the appropriate fields.
Maximizing both federal and private loan options also involves understanding the annual loan limits for federal student loans.
Loan Types
Maximum Annual Limits
Undergraduate students
Direct Subsidized loans and Direct Unsubsidized loans
Between $5,500 and $12,500, depending on year in school and dependency status
Graduate/professional students
Direct Unsubsidized loans (graduate students are not eligible for Direct Subsidized loans)
Up to $20,500 each academic year
You can add up the federal loans your child receives, as well as the work-study, scholarships and grants that make up their financial aid award. What is the gap between the amount of aid received and the amount still owed to the college?
Let’s use some fictitious numbers to illustrate the point. Let’s say your child receives the following:
$5,500: Federal loans
$9,500: Scholarships
$2,500: Work-study
$1,100: Grants
In this case, aid would amount to $18,600 in total. Let’s say that the cost of college is $25,000 (another fictitious figure). The gap between the cost and the award amount is $6,400, which means your child could then apply for a private loan to cover the rest of the costs.
Is a Private Student Loan a Good Option?
A private student loan can offer a wonderful opportunity to allow your child to achieve a college degree and their career ambitions.
However, it’s a good idea to consider all the angles of a private student loan, including the interest rate, loan limits, fees repayment penalty (the amount your child may have to pay if they pay off the loan before it’s due) and even customer service that the private lender may provide.
Consider encouraging your student to exhaust their federal student loan options first due to the federal protections they get with their federal loans, such as consolidation and loan forgiveness.
Your child can also drive down their interest rate with private student loans when they have access to a reliable cosigner with excellent credit. This could make federal student loans a great option.
How to Find the Right Private Student Loan
First and foremost, carefully compare options between private loan lenders, including repayment terms. You can help your child take the following steps to find the best student loans for college.
Step 1: Put together a lender list.
Help your child put together a lender list. Look at reputable companies known to support borrowers during repayment. You can eliminate any lenders that don’t line up with the eligibility requirements for your child’s particular situation.
Don’t forget to check with the financial aid office of the school your child plans to attend for a preferred list of lenders. Many institutions are direct lending institutions for college loans.
Step 2: Check the loan terms.
Loan terms tell you how long your lender expects you to pay back your debt. Unlike federal student loans, you do not get a standard repayment schedule for private student loans. Many private student loans give students 120 months (10 years) to repay their loans, but some private lenders allow a 25-year repayment term.
Also, find out what happens if you can’t make your payments. Private lenders don’t have forbearance programs if your child loses a job in the future, though the best loan providers for students may help out in a sticky situation.
Step 3: Get quotes and compare offers.
Prequalify with a lender next. Lenders will do a soft credit inquiry when they check your credit for prequalification, which doesn’t hurt your credit quite as much as a hard credit inquiry.
Next, compare offers to determine the lowest rate, best repayment term for your child’s situation, borrower protections and other benefits.
Step 4: Choose a lender.
Finally, choose a lender and complete an application using the lender’s process. Each lender will offer different instructions on how to get a student loan. Have items handy such as Social Security number, address, enrollment information in school, employment information, financial information, loan amount requested and financial aid information.
Every provider will have a different process on how to get a student loan. Most lenders will tell you the results quickly, but read the fine print before you make a final decision. Your child should have about 30 days to accept the loan offer and your lender should release the funds within weeks or months.
Can My Child Get a Private Student Loan without a Cosigner?
Eligibility requirements for a private student loan vary depending on your student’s lender and the loan you want to take out, but generally, your child will face limited options if they can’t get a co-signer.
How to Get Private Student Loans with Bad Credit
How might you help your student get student loans, even if you have bad credit? Naturally, you want to raise your credit score to increase your chances of cosigning a private student loan with your child. A couple tactics include paying off debt, making all payments on time and keeping your credit utilization low. Let’s take a quick look at all of these options.
Pay off debt: Having a lot of unpaid debt can affect your credit score. Paying off your debt may help raise your credit score and help you cosign a private loan with your child. You can benefit from paying off any debt you have, whether from your own student loans, credit cards, personal loans and more.
Make payments on time: Making payments on time can also increase your credit score for any loan you owe on. Setting up autopay on all bills can help you raise your credit score.
Keep credit utilization low: Your credit utilization ratio compares the amount of credit you use versus the amount of credit you have available. For example, if you have a credit card limit of $5,000 and use $1,000, in this particular instance, your credit utilization limit is 20%: $5,000/$1,000 = 0.20 x 100 = 20%. Try keeping this number below 30%.
You can’t pinpoint an exact time that your credit score will take an upswing, it’s always worth trying to make it happen so you can become a cosigner for your child.
FAQs
Let’s take a look at a few frequently asked questions about private loans for college.
What are the eligibility requirements for a private student loan?
Lenders each have their own eligibility requirements. In general, your child must be a U.S. citizen or permanent resident, attend school at least half time and qualify with a cosigner. Understand the risks before you become a cosigner, because you’ll need to make monthly payments on your child’s loan if they default on their loans. Getting a loan without a cosigner can cause your child to pay more in interest over time.
How do you find the best private student loan?
What is the best student loan? Shop around to find the best private loan. Check on interest rates, fees, customer service, ratings among current customers, repayment options, including repayment flexibility and more. The private loans that have the lowest interest rate and most favorable customer service options, fees and repayment options should catch your interest. However, consider having your child take advantage of federal student loans first, which usually offer more repayment perks and lower interest rates.
Do private student loans have fees?
Private student loans can come with fees, such as the origination fee (the amount your child pays to to take out a loan, which is the percentage of the loan fee), the application fee (the fee charged to process your application), late payment fee (the fee your child pays if they don’t make on-time payments) and prepayment penalty (the fee for paying off the loan early). Make sure your child can pay the loan off whenever they want.
Methodology
Here’s how College Money Tips chose the best private student loan lenders: We reviewed interest rates, repayment options, loan amount options, cosigner details, fees, Better Business Bureau (BBB) rating, customer service and other benefits. We aggregated the data based on all of these factors and made decisions based on top scores in each category.
Types of Financial Aid
