How to borrow for college
- As the cost of college keeps rising, borrowing money to pay for school has become the norm. You may not be able to avoid borrowing for college, but you want your child to accumulate as little debt as possible.
Know your options for federal and private student loans.
As the cost of college keeps rising, borrowing money to pay for school has become the norm. Total student loan debt in the U.S. reached a record high of $1.57 trillion in 2020—an increase of about $166 billion since 2019.1
You may not be able to avoid borrowing for college, but you want your child to accumulate as little debt as possible, says Mark Kantrowitz of FinAid.org, an online resource for college financial information.
“The way families should think about loans is, ‘What is this going to cost me?’” Kantrowitz says, “because the best time to reduce your debt is before you incur it.”
There are three major types of college loans. Here’s how they work:
Federal student loans
Federal student loans (called Stafford Loans) are loans that are made to students, not to parents. Students obtain the loans through the school, but the government supplies the funds. To start the process, students fill out the Free Application for Federal Student Aid (FAFSA).
Stafford loans are the most common type of student loan. They have a fixed interest rate and come in two varieties: subsidized (the government pays the interest while the student is in school) and unsubsidized (the student pays the interest). Whether your student receives a subsidy depends on his or her financial need.
Federal parent loans
Parents can use the federal Parent Loan for Undergraduate Students (PLUS) to pay for college costs not covered by their child’s financial aid. Parent loans have a fixed interest rate, and the parents, not students, are responsible for repaying the debt.
Private student loans
Private student loans are offered by banks and other private institutions. Each has its own program and terms, with interest rates and fees usually determined by the borrower’s credit score. A parent may be able to help the student receive a better deal by co-signing the loan, notes Kantrowitz.
Private student loans are often used to help fill the gap when federal loans, scholarships, grants, and work-study programs don’t quite meet your financial need.
While you might need to borrow for college, remember that the best way to minimize debt is to save for college before your child gets there, Kantrowitz adds. Start saving early with a tax-advantaged account such as a 529 savings plan. “Every dollar you save – or win through a scholarship – is a dollar you don’t have to borrow.”
And most experts agree on one thing: Don’t sacrifice your retirement savings to finance your child’s education. While loans, financial aid, scholarships, and grants are available for college, they’re not for your retirement.
1“Student Loan Debt Reaches Record High as Most Repayment Is Paused,” Experian February 24, 2021
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