Borrowing money for school? Know what it costs you


For every person who dreams of going to college, there is the reality check of how much it’s going to cost. Most students and parents can’t pay for post-high school education out of pocket. Students who did really well in school may be offered scholarships to ease the cost. State and federal grants can also help. They are based on financial need and don’t have to be repaid.

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But those options might not cover all your expenses. Borrowing money may be necessary. According to, the average student loan debt in 2007-2008 was $23,186 for graduating seniors.

Additionally, two-thirds of all students graduating with a bachelor’s degree borrowed at least some money. This means that most undergraduate students depend on loans to pay for at least some of their education.

Since there is more than one kind of loan, it’s important to examine all the options.

The first type is federal loans. These loans are issued by the federal government to the student and are based on the student’s income, family income and cost of the college. Some are subsidized, meaning the government lowers the interest rate to 4.5 percent. Interest does not accrue on these loans while the student is in school. Some loans are unsubsidized and have a higher interest rate, 6.8 percent interest rate. Interest does build up on these loans while the student is in school. Federal loans do not need a co-signer, somebody who promises to pay if you cannot.

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Private student loans are not based on financial need and are given out by banks and credit unions to parents or to students. Private loans were once simpler to get than federal loans because the FAFSA was not required. James Hammar, a financial aid counselor at the University of St. Thomas, said the government recently added more questions for people to answer before they take out private loans. These new questions are a part of new regulations to encourage people to take out federal loans before private loans.

Borrowing money for school? Know what it costs you.

It’s a good idea to use one of the calculators available online to figure out how much repaying your loan will cost you each month and in total after you leave school. Using the calculator at the government’s financial aid website we checked out the monthly payments for someone with the national average $23,186 in student loan debt.

A 10-year repayment term is equal to 120 months, or 120 payments. So a student who started college in September 2010 and graduated in 4 years would have these loans paid off in September 2024.

  • A federal subsidized loan has a 4.5 percent interest rate. To pay back the $23,186 in 10 years means paying $240.30 a month. So you pay back the original $23,186, plus $5,650.00 in interest. Total cost: $28,836
  • A federal unsubsidized loan has a 6.8 percent interest rate. To pay the money back in 10 years means paying $266.83 a month after you graduate. That means you pay back the original $23,186, plus $8,833.60 in interest. Total cost: $32,019.60

Some private loans carry interest rates as high as 12.2 percent. To pay the money back in 10 years would mean paying $335.34 a month after graduation. This means you pay back the original $23,186, plus $17,054.80 in interest. Total cost: $40,240.80

The interest rates on private loans tend to be higher than the interest rates on federal loans. Both Hammar and Michelle Overtoom, a counselor at the University of Minnesota’s financial aid office, said that interest rates in private loans vary by company and your personal credit rating. For example, the interest on a U.S. Bank education loan ranges from 4.2 percent to 12.2 percent.
For the most part, private student loans are best when you need a large amount of money right away or do not qualify for federal loans because your parents make too much money. Additionally, if you’re not in school at least half-time or are not pursuing a degree, private loans may be your only option. Private loans also can help fill the financial gap when scholarship and grant money is not enough. According to Hammar, most private loans require a co-signer, someone who signs the loan agreement along with you and says they’ll pay off the loan if you aren’t able to.

Paying back your loans

The downside of private and federal loans is that you cannot escape them, even if you file for bankruptcy, which allows you to escape most other types of debt.

A definite plus to federal loans is that they give you more flexibility for repaying the money. One payment program is the Income-Based Repayment, a plan that tailors your loan payment to how much money you make. IBR allows payments on separate loans to be made in a single payment that is generally no more than 10 percent of the person’s income.

More information about IBR can be found at

More generally, federal loans are more flexible and can be paid back over 10 to 25 years. If that time is not enough, or you are going through some economic hardship, federal loans are a lot more forgiving. Banks that issue private loans usually give you about 10 years after graduation to pay back your loan.

It’s helpful to have an idea of what your monthly payments might be right after they leave school. The Department of Education has several calculators to help you figure out how much money you might have to pay each month.

Check it out at

If you work certain kinds of jobs after college, your loan can be forgiven. For example, public service loan forgiveness will cancel your loan debt after 10 years of working full-time in a public service job such as public health nursing, early childhood education, or as a public or school librarian. Volunteering with AmeriCorps or the Peace Corps also gives you a certain amount of loan forgiveness. There are lots of rules for loan forgiveness programs, but they are worth investigatng.

More information about public service loan forgiveness can be found at

Asking questions

Speaking with a financial aid counselor at the school you want to attend is a great way to start to understand how to pay for college. Their help ranges from figuring out how much your household income is to answering questions about the FAFSA.

Overtoom said that it’s important for students shopping for loans to ask questions like “What are the repayment options available?” and “Can the interest I pay be deducted from my income taxes?” Those questions can lead you understanding more and making the choice that’s best for you.

She suggested that students set a budget for their yearly expenses. Only after students take advantage of grants, scholarships, and work-study job should they consider loans. Make sure you’re using them for what you need, not for extras like big-screen TVs or trips over spring break, she advised.

Even if you have your heart set on one school, reconsider where you want to go if you can’t afford it. If you get a better financial aid offer from another college, take it to your first-choice school, and see if they will increase their offer.

Ricardo Fjelstad de Santiago is a freshman at Minneapolis Community and Technical College.