Janice Lozano
Student loans can be a great way to fund your education and cover a range of costs, but it's important to understand the responsibilities and potential consequences that come with them. While student loans can provide financial support for tuition, housing, meal plans, and other essential expenses, borrowers often end up paying more than they originally borrowed due to interest accrual. Understanding the unique traits of student loans, such as interest accrual policies and loan forgiveness programs, can help borrowers make informed financial decisions and effectively manage their debt. Additionally, exploring alternatives like scholarships, crowdfunding, or part-time jobs can supplement student loans and reduce overall financial burden.
| Characteristics | Values |
|---|---|
| Student loan usage | Living expenses, tuition fees, fees, meals, child care expenses, computers, software, costs of studying abroad, disability-related expenses, transportation, on- or off-campus housing, housing supplies, books and supplies, equipment |
| Student loan misuse | Vacation, luxury purchases, entertainment, shopping spree, expensive bar or restaurant outings, buying a car |
| Student loan repayment plans | SAVE, PSLF, IDR, ICR |
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What You'll Learn
Student loan repayment plans
Student loans can be used to pay for a wide range of education-related expenses. Lenders allow the use of student loans to cover fees, including lab, materials, and campus fees not covered by tuition. They can also be used to pay for meal plans, groceries, child care expenses, computers and software, disability-related expenses, transportation to and from school, and on- or off-campus housing, including rent and utilities. Essentially, if an expense is essential to your educational success, it is likely a permissible use of student loan funds.
However, it is important to note that misusing student loan funds can lead to consequences, such as accruing more student loan debt. While student loans can cover basic living expenses, they should not be used for non-essential purchases, such as vacations or luxuries. Doing so may result in borrowers needing to borrow more money or turn to high-cost credit card debt to meet essential expenses.
In terms of repayment plans, the U.S. Department of Education offers various options for federal student loan repayment. The department encourages borrowers to select a legal repayment plan that fits their needs and helps them achieve financial sustainability. For instance, borrowers in the SAVE Plan are urged to transition to a legally compliant repayment plan, such as the Income-Based Repayment Plan, to access loan benefits and make progress toward loan discharge programs. The department provides resources like the Loan Simulator to help borrowers compare available repayment plans and make informed decisions.
Additionally, the Department of Education has been working to improve the processing of IDR applications and provide clear instructions to borrowers on their legal obligations and the benefits of regular repayment progress. These efforts aim to simplify repayment options and better serve borrowers while ensuring they repay their loans.
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Loan forgiveness programs
- Public Service Loan Forgiveness (PSLF): This program is for those who work full-time in government or not-for-profit organizations. After making 120 qualifying monthly payments under the PSLF program, you can apply to have your remaining loan balance forgiven, tax-free.
- Teacher Loan Forgiveness: If you teach full time for five complete and consecutive academic years in certain elementary or secondary schools serving low-income families, you may be eligible for forgiveness of up to $17,500.
- Total and Permanent Disability (TPD) Discharge: If you have a physical or mental disability that severely limits your ability to work now and in the future, you may qualify for a TPD discharge and won't have to repay your federal student loans.
- Segal AmeriCorps Education Award: If you complete a term of national service in an approved AmeriCorps program, you are eligible to receive this award, which can be used to repay qualified student loans.
- IDR Plans: These plans base your monthly payment on your income and family size. At the end of the term, your student loan balance may be forgiven after making 240 or 300 monthly payments over 20 or 25 years. One such IDR plan is the SAVE plan, which may provide the lowest monthly payments and reduced times to getting loan forgiveness.
It's important to note that loan forgiveness is different from repayment, and some states may count your loan forgiveness as taxable income. Additionally, federal student loans are the most common type of loan eligible for forgiveness, while private loans are usually not covered by these programs.
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Student loan interest
For the 2025-2026 academic year, the lowest federal loan rate is 6.39%, available to undergraduate students. Unsubsidized and Direct Plus loan rates for graduate students are currently at 7.94% and 8.94%, respectively. Private student loan interest rates range from about 2.99% to 17.99%. Refinance student loan rates are slightly higher, with the lowest rates starting below 4% and capping out just under 14%.
Federal student loan interest rates have increased significantly in recent years. From 2020-2021 to 2024-2025, the interest rate for undergraduates increased by 137.5%, from 2.75% to 6.53%. Interest rates for graduate and professional students have not fallen as quickly as those for undergraduates.
It's important to understand how interest accrues on your student loans to make informed financial decisions. Interest can significantly increase the total amount you repay, and it's essential to consider the impact of interest when choosing a loan repayment plan. Additionally, borrowers may be able to deduct student loan interest from their taxes, which can provide some financial relief.
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Student loan misuse
The U.S. Department of Education actively fights fraud in student aid to protect taxpayers and ensure accountability measures at every step of the student aid process. The Department uses data models to identify suspicious or inconsistent information on FAFSA forms and works with law enforcement to detect, investigate, and prosecute fraudsters. They also provide information on how to avoid student aid scams and protect against identity theft.
To avoid misusing student loan funds, it is important to understand what the Department of Education considers "qualified educational expenses." While student loans can cover a range of costs related to higher education, including fees, meal plans, childcare expenses, transportation, housing, and essential supplies, it is recommended to borrow only what is needed for academic pursuits to maintain financial peace of mind after graduation.
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Student loan alternatives
Student loans can be a great way to fund your education, but they are not the only option available. Here are some alternatives to student loans that can help you finance your education:
Scholarships and Grants
Scholarships and grants are a great way to fund your education without incurring debt. Scholarships are usually based on a student's grades, skills, or abilities, and they don't have to be repaid. Grants, on the other hand, are often disbursed to the school, but some programs may provide funds directly to students for living expenses. Most grants don't need to be repaid, but a service commitment may be required. For example, TEACH grant recipients must commit to teaching at an approved school for at least four years; otherwise, their grants are converted to loans.
Work-Study Programs
Work-study programs allow you to work and earn money to pay for your education. The federal work-study program is open to undergraduate, graduate, and professional students enrolled full- or part-time with demonstrated financial need. If you don't qualify for the federal work-study program, you can consider a part-time job to earn money for your education.
Personal Savings and Income Share Agreements
If you have personal savings, you can use them to pay for your education. A 529 plan is a tax-advantaged way to save for college. Income share agreements are another alternative where you get help paying for school in exchange for a percentage of your future earnings.
Federal and Private Student Loans
If you've exhausted other options, you can consider borrowing federal or private student loans. Federal student loans provide benefits that aren't typically available with private loans, such as lower interest rates and the option to apply for additional loans if you didn't receive enough financial aid. Private loans usually require a cosigner and may have higher fees or interest rates.
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Frequently asked questions
Some ways to pay off student loans include getting a part-time job while in college, relying on your savings, and enrolling in the SAVE plan, which is the most affordable student loan repayment plan.
It is recommended to borrow as little as you need and to avoid using student loans for anything unrelated to your education, such as a vacation or shopping spree.
One of the biggest consequences of misusing student loan funds is accruing more student loan debt. This can create a situation where you need to borrow more money or turn to higher-cost options, like credit cards, to meet expenses.
Qualified educational expenses include fees, meal plans or groceries, child care expenses, computers and software, costs of studying abroad, transportation to and from school, and on- or off-campus housing.
While lenders don't track how you use your student loans, it is best to avoid using student loan funds for anything unrelated to your education. Student loans should be used for basic living expenses, such as rent and utilities, rather than non-essential expenses.
