What Student Loan Options are Available?

Written by:

Baylor Cox

Reviewed by:

• Erin Frizell

For many individuals, borrowing for college is the only path to earning a degree that can spark a fulfilling career and possibly a lifetime of financial security. However, with all the talk of a student loan crisis, six-figure student loan debt, and unsustainable student borrowing, it’s easy to wonder if borrowing for college is a good idea.

How to Get Started

Once accepted to a college, you will receive a financial aid offer letter that may include assistance from a variety of programs. Federal financial aid is available in the form of grants, work-study programs, and loans. Some of the loans do not have to be paid back if certain conditions are met. To check your child’s eligibility, always submit a Free Application for Federal Student Aid (FAFSA).

Recent Changes to the FAFSA Application Process: What to Know

Typically, the FAFSA application process opens on October 1 for students and families starting college the following year. Here are a few of the key changes:

Streamlined application process: The FAFSA has been greatly simplified and reduced from 108 questions down to just 36, making it much easier and faster for families to apply for funding.

Discount eliminated for multiple children in college: Previously, financial aid eligibility increased for families with more than one child enrolled in college at the same time. Under the new legislation, the FAFSA no longer provides this discount.

Expected Family Contribution (EFC) replaced by Student Aid Index (SAI): The method of calculating how much aid you are eligible for has changed significantly. Expected Family Contribution (EFC) is no longer the metric used to calculate need-based aid. Instead, a new metric, Student Aid Index (SAI), is used. To help determine what you qualify for, review the Student Aid Index Chart and Calculator to see how your family will score.

Determining which parent completes the form in the case of a divorce or separation: Previously, in a two-parent household, either parent could complete the FAFSA. However, if the parents were divorced or separated, the custodial parent was required to fill out the FAFSA and that parent’s income and assets were counted for financial aid purposes.

The income used was for the prior-prior year, meaning if you were submitting the FAFSA in 2024, you used your 2022 tax return, instead of the most recent return. The new legislation requires the divorced parent who provided the most financial support in the “prior-prior” tax year to complete the FAFSA, instead of the custodial parent.

The parent who provided the most support in 2021 must complete the 2023 FAFSA for the 2024-25 award year. In cases in which the support provided is 50/50, it may default to the parent or household with the highest adjusted gross income (AGI). It’s important to note that even if the parents were never married, these same rules apply.

529 Accounts may now be reported on the FAFSA: About the first $10,000 will fall under the Asset Protection Allowance (the exact amount depends on the older parent’s age). Any parental assets over that could reduce the aid package by up to 5.64% of the asset’s value.

No financial consequences for contributions made by others: Previously, families were required to report “money received or paid” from others on the student’s behalf on the FAFSA. This means that if grandparents, other relatives, friends, or others outside the immediate family provided financial support to help pay for college costs, it had to be reported.

Under the new legislation, this form of untaxed income will no longer be considered in the SAI and cannot affect a student’s chances for need-based financial aid. Many advisors still recommend waiting until the student’s senior year or until graduation, to ensure their contributions do not adversely affect non-FAFSA based awards. Some schools may have their own scholarships and grants based on merit or need, not necessarily on FAFSA.

For more comprehensive information on the changes to the FAFSA application process, see this article from Kiplinger.

U.S. Department of Education Loan Programs

The U.S. Department of Education offers the following loan programs. It’s important to note that a key component of how much the student must repay is when interest starts accruing. In addition, “subsidized” loans mean the government pays the interest while the child is in school.

• Direct Subsidized Loans are loans made to eligible undergraduate students who demonstrate financial need to help cover the costs of higher education at a college or career school. Repayment typically must start within six months of graduation, leaving school, or going below half-time attendance.
• Direct Unsubsidized Loans are loans made to eligible undergraduate, graduate, and professional students (for example, medical school), but in this case, the student does not have to demonstrate financial need to be eligible for the loan. Interest on the loan begins accruing immediately. The same repayment rules as subsidized loans apply.
• Direct PLUS Loans are loans made to graduate or professional students and parents of dependent undergraduate students to help pay for education expenses not covered by other financial aid. The same repayment rules as subsidized loans apply.
• Pell Grants and other types of federal student aid grants are available as direct aid (grants do not need to be repaid) based on exceptional financial need and the cost of attending college. Check out U.S. Dept. of Education Federal Pell Grant Program details.

State Financial Aid Programs

Students can also benefit from state financial aid programs. General information about these programs is available from the National Association of State Student Grant and Aid Programs. In addition, corporations, foundations, and communities offer scholarships, grants, and endowments to students, many of which are not primarily based on financial need or academic achievement.

Many colleges will also offer additional financial aid based on merit or need. Be sure to contact the school’s financial aid office to see what other forms of aid may be available.

Federal Tax Credits Available

There are two federal tax credits available to help with paying for college expenses. The American Opportunity Tax Credit provides a tax credit of up to $2,500 per year per student. It is for qualified higher education expenses for students in their first four years of post-secondary schooling. However, there are income limits to be able to take advantage of this credit.

The Lifetime Learning credit allows for a tax credit of up to $2,000 per year per tax return. The credit is for qualified higher education expenses for students at any stage of their post-secondary education. Like the American Opportunity credit, there are income limits in order to use the credit.

Be sure to check the Internal Revenue Service’s Publication 970, “Tax Benefits for Education,” for more information on these tax credits, including current income limits.

Student Loans

Taking out a student loan is always an option. However, you’ve likely seen many news reports and articles about the loan debt that many students are accumulating to attend college. Here are some facts:

• 43.5 million borrowers with outstanding student loans
• Estimated $1.7 trillion in total student loan debt in the U.S.
• Student loan delinquency rate of 11% (default within the first year of repayment)
• Each borrower has an average of $37,787 in student loan debt

Student loan debt doesn’t just affect recent graduates. It continues to significantly impact people’s financial lives even into their older years.

Age Group	Amount Owed
24 and younger	$104 billion
25 to 34	$497 billion
35 to 49	$634 billion
50 to 61	$293 billion
62 and older	$107 billion

Student Loan Repayment Options

If you find yourself struggling to make loan payments, temporary solutions include asking the lender for a suspension of payments for a specific period, a reduction in the amount of the payment for a time, or an extension of the time to repay. If there are multiple loans, consider either student loan refinancing or a loan consolidation.

Refinancing

To pay for college, you may have used a mix of loans from private lenders and loans from the federal government. The interest rates, balances, and terms for each of those loans may vary. Some of your loans may have variable rates while others have fixed rates.

Student loan refinancing, which can only be done with a private lender (including banks and credit unions), is designed to help you combine all your student loans — federal and private — into a single, more affordable loan. That new refinanced loan will have a brand-new interest rate which, if your credit is in good shape, could be lower and at a fixed rate.

There are pros and cons to refinancing. For more details, check out the federal student aid website.

Consolidation

If you have federal loans and want to maintain the protection and other benefits that come with them, you have another option — student loan consolidation. Federal loan consolidation involves combining all your existing federal student loans into a single loan with the federal government.

Unlike refinancing into a private loan, which allows you to refinance both federal and private loans, the federal government will only consolidate government loans. There’s another key difference with consolidation: the interest rate, which will be a fixed rate, won’t be lower. Rather, it’ll be a weighted average of all the interest rates on your current federal loans rounded up to the nearest 1/8%. The U.S. Department of Education offers Direct Consolidation Loans, which require no application fee.

Federal Student Loan Repayment Plans

You can pick from repayment plans that determine your monthly payment based on your income or plans that give you a fixed monthly payment.

Repayment plans based on your income are a smart choice to lower your payment. For example, payments on the Saving on a Valuable Education (SAVE) Plan are no more than 10% of your discretionary income. The lower your income — or the larger your family size — the less you’ll pay each month.

Fixed Payment Repayment Plans

The fixed payment repayment plans include the Standard Repayment Plan, the Graduated Repayment Plan, and the Extended Repayment Plan. These plans base your monthly payment amount on how much you owe, your interest rate, and a fixed repayment time period.

Income-Driven Repayment (IDR) Plans

IDR plans base your monthly payment on how much money you make and your family size. There are four IDR plans:

• Saving on a Valuable Education (SAVE) Plan
• Pay as You Earn (PAYE)
• Income-Based Repayment Plan (IBR)
• Income-Contingent Repayment (ICR) Plan

Each of these has important differences, such as the term of the loan and the percentage of your income your payment will be based on, so analyze them carefully or consult your financial planner. Check out Repayment Plans | Federal Student Aid for more details.

Student Loans: A final thought

You owe it to yourself to do some in-depth research to see which careers offer you the most personal reward and long-term opportunities, then decide if taking on the amount of student debt you’re considering is worth it. The federal government’s Bureau of Labor Statistics publishes an annual Occupational Outlook Handbook that shows the median pay and projected demand for workers in almost any occupation over the next 10 years at various levels of education.

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