Whether you’re in school, planning for college, or are a parent of a college-bound student, it’s important to understand your options for paying for college. The cost of higher education has been rising steadily, putting pressure on families who want to provide a college education and capitalize on the potential advantages a degree can bring but who may be puzzled by how to pay for college and what the financing options are.

The most recent figures from the College Board put the average cost of tuition and fees at nearly $35,000 annually for private colleges. State colleges are significantly less expensive, with in-state residents paying an average of just under $10,000 per year for tuition and fees.

For many students, student loans are the path to a degree and the potential advantages or increased earning potential a college degree can bring. Students graduating in 2017 who had college loans carried an average of $39,400 in student debt at graduation. Cumulatively, student debt totals approach $1.5 trillion among 44 million borrowers. Of those student loans, over 10% are over 90 days late of in default. By comparison, credit card delinquencies of 90 days or more past due are at about 7%, with total credit card debt being over $600 billion less than total outstanding student loan debt.

Borrowing for college can be risky business and the costs associated with borrowing can linger for decades. It’s best to explore your options for scholarships or student aid to limit borrowing or (hopefully) to avoid it altogether.

Free Application for Student Aid

Your first step in seeking student aid is to complete the online application at https://studentaid.ed.gov/sa/fafsa. This is a free process. If you encounter ads that offer student aid assistance for a fee, check the URL in your browser. You’re likely at the incorrect website. FAFSA requires no payment to apply. The FAFSA application may also apply to some local or state aid as well, in addition to being the gateway for federal financing options.

Timing is important. The best time to apply is immediately after Jan 31 during your senior year in High School. Many financial aid packages are given out on a first come first serve basis (in addition to other qualifying factors), so this is one case where you don’t want to be the last person in line. For example, the opportunity to secure a Perkins loan, which we’ll discuss later, might be missed if you wait to apply.

If you are approved for financial aid, you’ll still need to complete a FAFSA application each year because your qualification can change based on income or other factors.

The Department of Education also provides a handy guide on avoiding college aid and college loan scams, a common problem for aid-seekers.

Also, contact the financial aid office for the school you’ll be attending. The people working in the financial aid office will know which forms you should complete, what opportunities are available, and where your time is best invested. While the process can seem exasperating, being patient and polite will get you further when you’re seeking assistance.

While applying for student aid can seem complicated, it’s really just completing an online form. You can also mail in an application and the Department of Education now offers an app for iOS and Android as well, called myStudentAid. You’ll need some documentation to provide numbers for your application, including your Social Security Number, bank statements, W-2s, and federal tax returns.

Student loan interest costs

If you’re able to reduce the amount you’ll need to borrow, either through student aid or through choosing an in-state school, the amount of money you can save on your loan can be significant. For example, using the average student loan balance for new grads at about $40,000, the interest expense on a 10-year loan is over $13,000, assuming 6% interest. Reducing the borrowed amount to $20,000 cuts the interest to about $6,600. If you’re able to reduce the borrowed amount down to $10,000, perhaps by attending an in-state school and working part-time, your interest expense is down to about $3,300. The decisions you make now have long-lasting effects.

Types of student loans

Student loan lingo can seem complicated. Generally, there are two types of student loans: federal and private. However, there are subtypes, which we’ll discuss. Federal loans are available as either Stafford Loans or as Perkins loans. PLUS loans are also available as a federal loan for parents of students. Private loans represent about 10% of all student loans and are governed by the rules set by each lender. In many cases, a federal loan is easier to qualify for than a private lender loan and comes with lower overall loan costs, but it might pay to shop around to learn your options.

Stafford loans: Stafford loans are loans made directly to students by the U.S. Department of Education. Depending on how your loan is structured, your Stafford loan might be subsidized, meaning there is no interest while in school at least part-time. For an unsubsidized loan, interest accrues from day one of your loan. Whether your Stafford loan is subsidized or unsubsidized depends on your financial qualifications. Applicants with a demonstrated financial need may qualify for a subsidized loan.

Perkins loans: A Perkins loan is a type of student loan available for undergrads or graduate students that is financed by the school but is guaranteed by the federal government. The amount you can borrow with a Perkins loan is capped, meaning you can only borrow a limited amount, currently $27,500 total ($5,500 per year) for undergraduates and $60,000 ($8,000 per year) for graduate or professional students.

Perkins loans are available based on exceptional financial need and come with some attractive benefits if you qualify. The interest rate is 5% and Perkins loans are subsidized in a unique way: the federal government pays your interest for you while you are in school, assuming you continue attenting school at least half-time. Notably, there are no additonal fees associated with funding your Perkins loan. Not all schools participate in the Perkins loan program, so check with your financial aid office.

PLUS loans: Parent Loans for Undergraduate Students (PLUS) is another student loan option offered through the U.S. Department of Education. As the name suggests, these are loans made to parents of students. PLUS loans have stricter qualification guidelines than some other types of federal loans. Rates tend to be higher and PLUS loans do have some front-end fees that add to their cost.

Private loans: If there’s a soon-to-be high school grad in your household, it’s likely you’re getting offers for private student loans. Private student loans are governed by the repayment terms of each lender and fees and interest rates can vary. Typically, private loans have higher interest rates and fees than some government loan options but may be attractive when compared to a PLUS loan, for example. Examine the offer. Maybe it’s a fit for you.

Loan payment options and considerations

There are several possible payment paths your student loan can take, and your payment schedule may even change during the course of your loan due to deferment or other changes.

1. Initial repayment plan: This is typically 10 to 20 years. Most people choose this option.
2. Income-based repayment: This is the second most common option. In this case, your payments are restructured to better match your income. This option requires that you re-apply annually. Parents take note: Income-based repayment may be available for PLUS loans as well.
3. Student Loan Deferment: A deferment puts your loan on “hold” but does not remove your responsibility to pay your student loan debt. Typically, deferments are only approved for current students, military personnel, people who are unemployed, or people earning less than minimum wage. Interest will continue to accrue for unsubsidized payments, and compound interest can cause balances to grow faster than you might imagine if no payments are being made. If you’re able to make some occasional payments, these payments will help to prevent interest charges from growing the balance you’ll need to pay after deferment.
4. Student Loan Consolidation: Student Debt Consolidation Loans are available for federal loans at https://studentloans.gov or through a number of private lenders. You may also be able to consolidate your student loan debt with other debt through private lenders. As with all loans, read the fine print carefully and use an online calculator or spreadsheet to find the true cost of the loan. A seemingly lower interest rate loan with higher fees or a longer loan term may be more expensive in the long run. You really need to analyze each loan option on its own and not just look at the headline numbers of APR.

Consolidation loans can extend your repayment terms to lower your monthly payments to a more manageable number. However, because both time and compounding interest are at work, adding more time to your loan usually means the loan is more expensive from the standpoint of interest expenses combined with any fees associated with the loan.

1. Bankruptcy: Bankruptcy laws provide a way to restructure or wipe out many types of debt but student loans can’t be eliminated by bankruptcy. Only certain circumstances can elimanate student loan debt. Death is one example; if you die unexpectedly and have a student loan debt, the student loan debt that is in your name goes away.
2. Public service loan forgiveness: Government employees in local, state, or federal public service roles may have some of their student loan debt forgiven. You may still have to make 10 years of payments before becoming eligible for loan forgiveness, however. These payments also have to be on time. Public service loan forgiveness is available for Stafford, Perkins, and PLUS loans. Loan forgiveness of any type may have tax consequences because forgiven debt is treated as taxable income.
3. College savings plans: A 529 plan is a (possibly) tax-free way to save for college for your son, daughter, grandson, granddaughter, or whomever you choose as your beneficiary. The 529 is an investment account funded with after-tax dollars, but the gains and proceeds — if used for qualified education expense — come out tax-free. In many ways, a 529 plan is similar to a Roth IRA in structure but is used for education instead of retirement.

You can start a 529 plan with your broker or with most online brokerages. Be aware that funding overages not used for education can be subject to a 10% penalty and that gift taxes may apply for annual amounts above $15,000.

Should you get a student loan?

Over half of student loans are delinquent or in deferral. That number does include current students with loan deferrals but the percentage loans not being paid or being paid late is telling and speaks to the risk of assuming large student loan debts.

About 45% of students won’t graduate on time or won’t graduate at all, possibly prolonging college expense or postponing a move into the workforce where earnings can pay down debt. About 20% of all college graduates will remain unemployed or underemployed after graduation, placing more pressure on their ability to repay student loan debt. Some estimates put the number of underemployed college grads closer to 33%.

Over 60% of new jobs only require a high school diploma. In many cases, having a college degree can lead to higher earnings or move you ahead in line when applying for jobs but in many other cases having a degree makes no measurable difference.

Before choosing a field and financing tens of thousands in students loan debt that isn’t easy to escape, research the field you’re considering as well as the increase in earnings you can expect due to earning a degree. It’s possible that it doesn’t make financial sense to borrow money to pay for advanced education in a given field. There may, however, be a related field that piques your interest and in which the numbers line up better, creating a better value and a better justification for taking on debt to pursue a degree in that field.

Like with many areas in financial life, the best way to pay for college is with the savings you’ve built over time, such as savings in a 529 plan. Student loan interest is often tax-deductible but that doesn’t reduce the interest expense to zero. The real-world savings parallel your tax bracket, meaning you still pay the majority of the interest expense.

Look for ways to pre-fund your educational expenses, look into affordable in-state schooling options, invest the time in researching scholarships and financial aid options, and research your chosen area of study. Where many college grads get into trouble is by choosing a crowded field or a field in which limited income opportunities can make it difficult to meet ongoing loan obligations.