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Americans owe more than $1.6 trillion in federal student debt, and the average graduate leaves college owing $29,400. Fortunately, your state may be able to help. There are a number of states that pay off student loans through student loan repayment assistance programs. Some of these plans are meant to entice people to move to the state, while others are available to residents who work in certain professions. If you can qualify for one of these programs, you could get a major chunk of your student loan debt repaid for you.

Overview of State Loan Repayment Programs

State loan repayment programs (LRAPs) offer student loan assistance to eligible borrowers who are paying back student loans. Some programs act as an incentive to encourage people to move into certain areas or become homeowners in the state. Others are available to residents who work in a certain field, such as health care or law.

Unlike federal loan forgiveness programs, which only forgive federal student loans, some states that pay off student loans through LRAPs will help you repay both private and federal student loan debt. However, like most other student loan repayment options, there are stipulations. For instance, you may have to commit several years to living or working in an area in order to receive the maximum benefits.

State-by-State Loan Repayment Assistance

Here are some of the states offering repayment assistance to qualifying student loan borrowers, which could help you pay off student loans early. This list is not exhaustive, so check with your state to find out if it offers LRAP opportunities.

California
The California State Loan Repayment Program offers assistance to primary care physicians, dentists, dental hygienists, physician assistants, nurse practitioners, certified nurse midwives, pharmacists, and mental/behavioral health providers who practice in designated California Health Professional Shortage Areas. Award amounts can equal $100,000 or more, depending on whether you work full-time or half-time and how many years you serve.

Kansas
Kansas offers up to $15,000 in student loan assistance over five years to new residents who move to one of its Rural Opportunity Zones (ROZ). You must have a newly established permanent residence in an eligible ROZ and live there for the five years of repayment to qualify for the full amount.

Maine
Maine offers several perks for student loan borrowers, including three LRAPs and a tax credit:

•   Maine Dental Education Loan Repayment Program: This program offers repayment assistance up to $100,000 to dentists and dental health professionals working in underserved areas.

•   Maine Health Care Provider Loan Repayment Pilot Program: Designated for health care providers who live and work in Maine for at least three years, this program offers up to $75,000.

•   Nursing Education Loan Repayment Program: Established and new Maine residents who work as registered nurses or nurse educators for at least three years are eligible to receive up to $40,000 through this program.

•   Student Loan Repayment Tax Credit: Student loan borrowers who earned at least $12,917 in Maine could claim a student loan tax credit up to $2,500 annually with a lifetime limit of $25,000.

Recommended: How to Get the Student Loan Interest Deduction

Maryland
Maryland has a SmartBuy 3.0 program to help student loan borrowers become homeowners. To qualify for this program, you must owe at least $1,000 in student loans, purchase a home that meets the Maryland Mortgage Program guidelines, and borrow a mortgage from an approved Maryland SmartBuy lender. The program can provide up to 15% of the home purchase price (for a maximum of $20,000) for you to use to pay off your student loans.

Massachusetts
Health care providers in Massachusetts could receive as much as $50,000 in student loan repayment in exchange for working two years in an underserved community. You’ll need to be licensed to work as a primary care physician, dentist, physician assistant, clinical social worker, marriage and family therapist, or other qualifying health care profession.

Michigan
Michigan’s State Loan Repayment Program offers up to $300,000 in student loan assistance to health care providers who work in a designated shortage area. You must commit to a service term of at least two years to qualify for this program.

Ohio
The city of Hamilton in Ohio has a program to incentivize new residents to move to the area. The Hamilton Talent Attraction Program Scholarship offers up to $15,000 to borrowers who move to an area in the Hamilton city limits. It prefers graduates with a degree in science, technology, engineering, arts or mathematics.

Texas
The Texas Student Loan Repayment Assistance Program offers up to $6,000 per year to attorneys paying back student loans who work for a Texas legal aid program that’s receiving a grant from the Texas Access to Justice Foundation (TAJF). You also must have been licensed to practice law for fewer than 10 years and make no more than $80,000 per year.

Requirements and Eligibility

The requirements for state-provided LRAPs vary by program. Some are open to current residents, while others offer benefits to new residents who move to or buy a home in a certain area.

Programs that are designated for specific professionals often require you to work in a designated shortage area or with an underserved community. You’ll also generally need to commit to a certain service term, such as two or three years. Read over the fine print of a program’s requirements to see if it could be a good match for you.

If you can’t find a program that fits your specific situation, there are other ways to make it easier to repay your student loans. For instance, you might consolidate all your loans into one loan or refinance your student loans, ideally for a lower interest rate or better loan terms if you qualify. (Just be aware that refinancing federal student loans makes them ineligible for federal programs and protections like income-driven repayment.)

Application Process and Deadlines

The application process and deadlines also vary by loan repayment assistance program, and you can usually find this information on the official state or program website. You may need to fill out an application with details about your educational background and student loan debt. Often, a program requires you to commit to working half-time or full-time for a certain number of years.

These programs can be competitive, so make sure to get your application in well ahead of the stated deadline. Some programs also pay out a certain amount per month or year, so find out whether you need to submit additional applications to maintain your eligibility.

Loan Repayment vs Loan Forgiveness

Both loan repayment assistance programs and student loan forgiveness programs can help you pay off your education debt. However, loan repayment programs may offer assistance sooner, as some of these programs only require two or three years of service.

By contrast, the Teacher Loan Forgiveness program requires five years of service, while Public Service Loan Forgiveness requires 10. And income-based student loan repayment forgiveness requires 20 or 25 years of payments until your balance may be forgiven.

Loan repayment programs might also help you pay off both private and federal student loans, whereas only federal student loans are eligible for loan forgiveness programs.

Finally, loan repayment and loan forgiveness programs may have different tax implications. The loan forgiveness you get from PSLF is not taxable, for instance, whereas assistance you get from an LRAP could be treated as taxable income.

The Takeaway

When it comes to paying back your student loans, your state may be able to help. Several states offer loan repayment assistance programs to eligible borrowers who move to a certain area or work in a qualifying profession. By taking advantage of one of these programs, you may be able to get a major portion of your student loans paid off.

Even if your state doesn’t offer an LRAP, there are other ways to potentially make your payments easier, including student loan forgiveness, loan consolidation, and student loan refinancing for more favorable rates and terms for those who qualify. Carefully consider all your options for repaying student loan debt.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

FAQ

What types of loans qualify for state repayment assistance?

State repayment assistance programs generally pay off federal student loans, and some will pay off private student loans as well. Check with each individual program to find out what types of loans qualify for repayment assistance.

Can you receive assistance from multiple state programs?

You may be able to receive assistance from multiple state programs — if, for instance, you live in one state and get assistance and then move to another state and get assistance there — but you likely can’t do this simultaneously. Most programs require you to live and work in-state to be eligible for student loan repayment benefits.

How much student loan debt can state programs cover?

State programs can cover a significant portion of your student loan debt. The LRAP for health care workers in Massachusetts offers up to $50,000, while Michigan’s health care worker LRAP can provide up to $300,000. However, the amount will depend on the program and the field you work in.

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SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

SOSLR-Q324-019

An institutional student loan is a type of student loan you borrow from your college or university. Institutional loans are non-federal student loans, and the loan terms vary from school to school.

Institutional loans can help fill in the gaps other financial aid doesn’t cover. But it’s important to understand how these loans work to make sure they’re right for you.

Definition and Overview

Institutional loans are considered to be a type of private student loan. But unlike traditional private student loans, they are offered by your school rather than a private lender. Students may use these loans to help pay for college costs. However, some schools only allow the use of institutional loans for tuition and fees, and not for other education-related expenses.

Institutional loans are non-federal student loans. That means they don’t offer the same benefits that federal loans do, including deferment, forbearance, and student loan repayment options such as income-driven repayment plans.

How Institutional Student Loans Work

Institutional loans typically come in two types — short-term and long-term loans.

Short-term institutional loans generally have a low interest rate, but they may have a processing fee. These loans sometimes involve a credit check, and you’ll typically need to pay back student loans that are short-term within a few months. Check with your school about the specific repayment terms for the short-term institutional loans they offer.

Long-term institutional loans allow for longer repayment terms, such as 10 years, and payments may be deferred while you’re in school. The interest rates on these loans are usually higher, and the rate you get may depend on your creditworthiness.

Eligibility Criteria

To qualify for institutional student loans, borrowers typically must file the Free Application for Federal Student Aid (FAFSA). The eligibility criteria for these loans vary from institution to institution, so your best bet is to check with your school’s financial aid office.

Interest Rates and Fees

Interest rates for institutional loans range widely, depending on the school and whether the loan is short-term or long-term. Some colleges offer short-term loans with rates as low as 0% or 1%, while interest rates on long-term institutional loans may be 3% to 10%. Check with your school about the interest rates on these loans.

Repayment Terms and Options

The repayment term on an institutional loan is the amount of time the institution gives you to pay off your loan. Short-term loans typically need to be repaid quickly — in 90 days, say — while long-term loans have a repayment term of 10 years. Your school may offer different options for repayment, so be sure to inquire.

One option that you may not have with institutional loans is refinancing. With student loan refinancing, you replace your old student loans with a new loan that ideally has a lower interest rate or better terms. Refinancing might not be possible with institutional loans.

Pros and Cons of Institutional Student Loans

Institutional student loans may be a solution for students who need to bridge gaps in financial aid, but these loans have benefits and drawbacks to consider.

Pros of institutional loans:

•   Quick payoff: Short-term institutional loans typically require repayment in several months. If you need financial assistance now and expect to have funds to repay the loans at the end of the term, they might be an option for you. By comparison, paying off federal student loans can take 10 years or more.

•   Low interest rate: Some institutional loans have lower interest rates than federal or private student loans. But before committing to one of these loans, explore the different undergrad private student loan rates available to make an informed decision.

•   May not require a credit check: You might not need to undergo a credit check to be approved for an institutional loan, especially if it’s a short-term loan.

Cons of institutional loans:

•   No federal benefits. Institutional loans don‘t provide the same benefits that come with federal student loans, such as income-driven repayment plans and student loan forbearance.

•   May require a credit check. With long-term institutional loans, your school may require a credit check to qualify. That could make these loans more difficult to obtain.

•   May be tough to repay. Short-term loans typically need to be repaid in a few months. As a college student, that may not be feasible for you. In that case, you might want to consider low-income student loans instead.

•   Refinancing might not be possible. Federal and private student loans can be refinanced, but institutional student loans may not be eligible for refinancing.

The Takeaway

Institutional student loans are offered by colleges and universities to help cover school costs like tuition and fees. They may be helpful to students who have reached their financial aid allotment for the semester or those who need financial help immediately and can repay the loan quickly.

But institutional loans do have drawbacks. Repaying them quickly can be challenging for college students. And borrowers may need to undergo a credit check to qualify for them. Before choosing an institutional loan, you may want to look into other financial aid options, such as grants and scholarships, or consider private student loans, which have the option of refinancing in the future, if that’s something you might be interested in. Weigh all the different choices to make the best decision for your situation.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

FAQ

What are the benefits of institutional student loans?

Institutional loans offered by colleges and universities can help you cover school costs like tuition and fees if you’re coming up short. They may also offer low interest rates, quick repayment, and no credit check. However, make sure you can repay an institutional loan on time — the repayment term might be as short as three months.

Can institutional student loans be used for living expenses?

Whether an institutional loan can be used for living expenses depends on the institution. Some colleges and universities require borrowers to use institutional loans for tuition and fees. Check with your school to find out what their requirements are.

How do institutional student loans compare to federal loans?

Federal student loans offer more repayment options than institutional loans, and they also come with federal programs and protections you may want or need, such as deferment and forbearance. In comparison, short-term institutional loans typically take less time to pay off, which could make them appealing to those looking to avoid long-term student loan debt. The interest rates for some institutional loans may be lower than the interest rates for federal loans, but others may have higher rates.

It’s wise to explore the different requirements, terms, and benefits of each type of loan before you opt for one over the other.

Photo credit: iStock/dusanpetkovic

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

SOSLR-Q324-015

A loan is a sum of money that is borrowed and then paid back, both principal and interest, within a specific time frame. The interest you pay is for the privilege of getting that lump sum of cash in hand.

Whether it’s to continue your education or buy a house, borrowing money can be the key to meeting longer-term goals, both financial and personal. There are many different kinds of loans available, including unsecured personal loans, secured mortgages, and many other options in between.

Here, you’ll learn the basics of lending, including a few of the most common types of loans, what you’ll need to successfully apply for them, and what you should know before making the significant and at times risky decision to borrow money.

Definition and Basic Concepts

As soon as you start shopping for loans of any kind, there are a few terms you’re likely to hear, some of which may be unfamiliar. Get up to speed with this glossary of words commonly used to define and describe loans.

•   The principal is the amount of money you’re borrowing from the lender. For instance, if you take out a loan for $17,500, then the principal amount is $17,500. However, every time you make a payment, you’ll pay both principal and interest, which is why you’ll end up paying back more than $17,500 altogether. (It may also be possible to make additional, principal-only payments, which can help you pay the loan off more quickly and pay less interest overall.)

It’s worth noting that this concept of principal is a key way that loans vary from credit lines: With a loan, you typically get a lump sum of cash, while with a line of credit (such as a home equity line of credit, or HELOC, or a credit card), you borrow varying amounts as you need funds.

•   Interest is the money you pay to the lender for the privilege of taking out the loan — or the cost of the loan. Interest is often expressed as an annual percentage rate (APR), which includes any additional fees as well as the interest itself.

•   A loan’s term is the lifespan of the loan, or the length of time you’ll have to pay it back. For example, a personal loan might have a 60-month (five-year) term, meaning you’ll make 60 monthly payments to repay the loan in full (unless you pay it off early). Mortgages tend to have longer terms: typically 15 or 30 years.

•   Collateral refers to an asset that, as part of the loan agreement, the lender can seize in the event you fail to repay what you owe. A loan with collateral is known as a secured loan, and common collateral items include vehicles (as with an auto loan) and houses (as with a mortgage).

•   Your lender might be a bank, credit union, or an online financial institution. It’s whichever business is lending you the money and collecting your payments.

•   The borrower is the person or entity borrowing money and paying it back as outlined in the loan agreement.

Types of Loans

While there are many different kinds of loans out there — home loans, auto loans, personal loans, and even holiday loans — they can all be separated into two main categories: secured loans and unsecured loans.

Secured Loans

As briefly mentioned above, secured loans are those that are backed by collateral.

Collateral gives the lending institution a guarantee that they’ll get a valuable asset out of the deal if the borrower fails to repay the loan in full. That means the loan is less risky for the lender, which may have slightly less stringent qualification requirements or might charge a lower interest rate.

Unsecured Loans

Unsecured loans, by contrast, are those that are not backed by collateral. Unsecured loans, like personal loans, are sometimes also called “signature loans,” since all you’re offering as collateral is your signed promise to repay the loan. Because they’re riskier for lenders, unsecured loans may have higher interest rates as well as more stringent eligibility requirements.

Unsecured loans can usually be used for just about any legal purpose, from home renovations to wedding costs. Many people take out personal loans for debt consolidation; say, as a path to paying off high-interest credit card debt.

Common Loan Terms

While the specific agreement of your loan will depend on multiple factors, including your lender and the type of loan you’re taking out, there are a few features that many different types of loans share.

APR

Your interest rate will likely be expressed as an APR percentage. APR includes not only the interest itself but also the other costs associated with the loan, such as origination fees.

APRs can vary tremendously depending on an array of factors, including the economy, the size of the loan, the type of loan, your credit score and history, and more. At the low end, some people who took out a mortgage in late 2020 or in 2021 may have an APR below 3.00%. Others who have less-than-stellar credit scores might currently have an APR of 30.00% if they are seeking out a personal loan on the larger, riskier side.

The higher your APR, the higher the cost of the loan. People with higher credit scores and positive financial profiles are more likely to qualify for lower-APR loans, which can save them substantial amounts of money in interest over time.

💡 Recommended: What Is A Personal Loan?

Fixed vs Variable Interest Rates

Along with APR, you should also understand the difference between fixed and variable interest rates.

•   As the name implies, fixed interest rates don’t vary over the entire lifetime of the loan. That means you can enjoy regular, predictable payments in the same amount every month.

•   Variable-rate loans, on the other hand, can fluctuate with the market (though are usually governed by caps that keep the rate from rising over a certain percentage). Variable-rate loans may have lower rates at first, making them attractive, but payments can rise substantially over the lifetime of the loan. Or in some economic climates, they might fall lower. In either scenario, a variable rate can make budgeting more difficult.

Amortization

Amortization describes the way a loan is gradually paid off (both principal and interest) over time. Payments are typically made over a particular schedule, such as monthly for a certain number of years.

For example, with a fixed-rate home loan, you’ll typically find that the mortgage amortization occurs so that, toward the beginning, the bulk of your payment is going toward interest rather than principal. (This helps ensure the bank gets paid for their service up front.) Over time, a greater and greater percentage of the payment will go toward principal. However, the actual amount you’re paying each month will never change.

You can see the effect of amortization for yourself using a mortgage calculator.

Prepayment Penalties

Prepayment penalties refer to costs the lender might charge if you pay off a large portion of your loan early or repay the entire loan before the term has elapsed. Prepayment penalties help lenders make money on loans where they won’t receive the full term’s worth of interest. Prepayment penalties can help compensate the bank for this loss of interest income.

For borrowers, though, these charges can feel like punishment for what is generally a positive financial behavior: paying off your debt early. Whenever possible, it can be wise to look for loans that don’t charge prepayment penalties.

Loan Process

So, now that you understand a bit more about how loans work, consider how you go about getting one.

While each lender will have their own specific procedures and policies, the basic loan process can be broken down into four basic steps.

•   Application. The lender will collect information from you about your employment history, income, and other financial factors, as well as verify your identity. These days, loan applications can usually be filled out online, though you may also be able to apply in person or over the phone.

•   Approval. Once your lender verifies all your information — usually including a hard credit check — they will either approve or deny your application. If you’ve been approved, you’ll be informed about the approval, though it still may take some time for the money to come through.
Timing on these steps can vary greatly; a personal loan might get same-day approval, while a home equity loan, which typically involves a home appraisal, could take weeks.

•   Disbursement refers to the money you’ve borrowed actually hitting your account. You may be able to set up direct deposit so the funds can find their way into your bank account without any additional steps, but in other cases the lender might cut you a physical check. With a home loan, a closing with various parties and/or their lawyers present might be required.

•   Repayment is the phase of the loan where you pay back the funds borrowed (the principal) and interest and fees over time. This typically reflects the agreement drawn up when your application was approved. As discussed above, the repayment period, or term, could be as short as a year or two or as long as several decades.

Factors Affecting Loan Approval

Applying for a loan doesn’t guarantee you’ll be approved. After all, before transferring a large sum of money, your lender is going to want to feel confident that you can repay the debt.

Some of the most important factors that affect loan approval are your credit score and credit history, income, debt-to-income ratio (DTI), and the value of any collateral you put on the table. Here’s a closer look.

•   Your credit score is the three-digit number (typically between 300 and 850) that summarizes your credit history and how well you have repaid debts in the past. You may actually have multiple credit scores due to different scoring models and the fact that each of the three major credit bureaus may report somewhat different information. Credit score monitoring can help you understand the health of your credit file over time.

•   Your income is the amount of money you have coming in, usually from employment (but also potentially from investment interest or other sources). Lenders generally want to see a reliable flow of income to help ensure borrowers will be able to continue making payments over the entire lifetime of the loan.

•   Your debt-to-income ratio or DTI is an expression of the amount of income you have every month compared to the amount of money that’s already promised to other creditors. Depending on the loan and the lender, you may be able to qualify for certain loans with a DTI of up to 50%, but generally, the lower, the better. Some mortgage lenders won’t offer a mortgage to borrowers with a DTI higher than 36%, for instance.

•   For secured loans, the value of your collateral, such as the car or home you’re financing, is also considered as part of the calculus. A high-value asset or collateral makes the deal substantially less risky for banks, since they’ll still get some value out of the loan even if you don’t repay it.

Pros and Cons of Borrowing

Sometimes, borrowing money really can be a smart financial move, but it almost always comes with costs, so it’s important to think through the decision carefully. Here are some of the basic pros and cons of borrowing money.

Pros:

•   Loans can help you access longer-term goals, like homeownership or college education, that might not be possible if you had to pay out of pocket.

•   In some cases, debt in the short term can help you increase your financial standing in the long term. For example, student loans can help you gain skills that increase your earnings; mortgages can allow you to own an asset that can appreciate over time; and personal loans used for loan consolidation could help you improve your overall financial standing faster.

•   With unsecured personal loans, you can use funds for just about any purpose — making them flexible and convenient.

•   Some loans are quick and convenient; certain types can send money your way in just days.

•   Making on-time payments can help build your credit score over time.

Cons:

•   In almost all cases, loans cost money. High interest rates can mean purchases could cost far more than they would in cash over time.

•   If you fall behind on payments or carry large balances of revolving debt, loans could have a negative impact on your credit score.

•   Loans payments can stretch your budget, making it difficult to make ends meet each month and accomplish other financial goals, such as saving for retirement.

•   Certain kinds of loan applications can be time-consuming and can leave you waiting a long while to learn whether or not you are approved.

•   If you have a secured loan, you risk losing your collateral if you cannot keep up with your payments.

•   If you have a lower credit score, borrowing money can be more expensive, which can make your loan debt burdensome.

Alternatives to Traditional Loans

While traditional loans from a bank have long been available to borrowers, there are alternative resources worth considering if you need cash.

•   Credit cards are a common way for people to pay for things today with money they hope to have tomorrow. However, it’s wise to avoid using a credit card to buy more than you can afford to pay off before the grace period ends. Credit cards tend to have high interest rates (and higher still if you take a cash advance), and compounding can get out of hand fast.

•   Lines of credit may be available, such as a personal line of credit or a HELOC, allowing you to borrow funds up to a limit, with interest accruing.

•   Cash advance apps can help you access money from your next paycheck early, though the amount available tends to be relatively small.

•   Peer-to-peer (P2P) lending platforms are an alternative way to borrow that’s funded primarily by private investors. Some people who’ve been turned down for traditional loans may still qualify for P2P loans.

•   Family loans can work in some instances — depending, of course, on your family finances and dynamics. To avoid putting strain on a relationship, it’s often a good idea to formally write up a loan agreement including any required interest, the expected loan term, and what happens if the borrower defaults.

•   Buy now, pay later options can allow you to purchase an item and pay it off in installments, sometimes interest-free. This could be a way to snag, say, a new kitchen appliance when you don’t have cash in hand.

•   Payday loans allow you to borrow against your next paycheck, but proceed with extreme caution. The APRs on these can add up to 400% in some cases.

The Takeaway

A loan involves accessing a sum of money that you repay over time with interest to the lender, according to the terms of your agreement. Borrowing money can help you achieve your dreams, such as owning your own home or getting a graduate degree — but it usually comes at a cost, so it’s always worth proceeding with caution before signing on the dotted line. Understanding the full cost of the loan and its pros and cons will help you make an informed decision.

Are you considering a personal loan for debt consolidation, travel, home renovations, or another purpose? See what SoFi offers.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

FAQ

How does interest on a loan work?

Interest is the price you pay for the privilege of borrowing money. With most loans, interest is expressed as an APR, or annual percentage rate, which includes not only the interest rate itself but also any additional costs to the loan, like origination fees.

What’s the difference between a loan and a line of credit?

With a loan, you usually receive a lump sum of money up front which you then repay over the course of months or years. With a line of credit, instead of a lump sum, you receive a credit limit — the maximum amount you can borrow based on your financial credentials. From that amount, you borrow what you need up to your limit, and you can repay the line of credit and borrow again.

How do I choose the right type of loan for my needs?

The first step to choosing the right loan for your needs is to understand that there is a huge array of financial products available. What are loans can vary tremendously. For example, if you need money to buy a vehicle, a secured auto loan may have lower interest rates than a personal loan. If you need funds for a wedding, a personal loan may be the right option. It’s also worthwhile to shop around with different lenders once you know the type of loan you want. That can help you find the best possible loan terms, including the lowest interest rate.

Are there tax implications for taking out a loan?

There may be tax implications. The interest you pay on a mortgage is usually tax-deductible. In the case of personal loans, since they have to be repaid, they’re not considered income, so you won’t have to pay taxes on the disbursement. If the loan is forgiven, though, the cancellation of the debt may be considered its own form of income and may be subject to taxation on that basis. You may want to check in with a tax professional regarding your particular situation.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOPL-Q324-023

In 2023-2024, the average cost of attendance for full-time undergraduate students living on campus at four-year institutions was as follows:

•   Private nonprofit institutions: $60,420

•   Public four-year, out-of-state institutions: $46,730

•   Public four-year, in-state institutions: $28,840

Multiply that amount by at least four years, and you’re looking at a sizable investment in your future. But why is college so expensive, exactly?

Keep reading to learn five reasons why college is so expensive, what contributes to the rising cost of college, efforts to control costs, and more.

Factors Contributing to Rising College Costs

Several factors contribute to rising college costs, including faculty salaries and benefits, campus facility construction and maintenance, student services and amenities, administrative costs, and technology integration. We’ll dive into the details of each of these.

Increase in Faculty Salaries and Benefits

Faculty salaries increased an average of 4% between 2021-2022 and 2022-2023, which was a fairly substantial increase.

Faculty also receive benefits like employer contributions to retirement plans and health insurance, college tuition, Social Security contributions, disability income protection, unemployment insurance, group life insurance, workers’ compensation premiums, on-campus parking, and fringe benefits, like athletic event tickets. Non-salary benefits can amount to up to one-quarter of faculty member compensation.

Recommended: How to Pay for College

Construction and Maintenance of Campus Facilities

Studies have found that prospective students reach their decisions within the first ten minutes of walking on campus. Therefore, campuses must do more than just satisfy the basic needs of their students. They must convey emotion, create positive reactions, and offer “extras,” like aesthetics, all of which results in high construction costs to create a lasting positive environment for faculty, staff, and students, which can include:

•   Code requirements, including stair towers, fire-rated corridors, fireproofing, fire alarm systems, sprinklers, and more.

•   Legislative mandates related to the ADA, EPA, OSHA, and ASHRAE, which dictate accessibility, dust control, occupancy, ventilation, air filtration, and more.

•   Institutional requirements, like minimal disruption to campus life, job site cleanliness, limiting noise, complex phasing-in schemes, and more.

•   Short timelines that protect athletic event schedules, residence hall occupancy, and other conditions.

•   State-of-the-art facilities, such as high-occupancy performance and athletic venues, technology-infused learning environments, and highly functional classrooms, labs, meeting rooms, offices, and other complex mechanical systems.

•   Higher-quality finishes, including hardware, carpets, flooring, restroom fixtures, and more to maintain durability.

•   Sustainability requirements, such as Leadership in Energy and Environmental Design (LEED) metrics based on campus sustainability commitments.

•   Technological advances and other additions, such as hearing loops in public assembly spaces, gender-neutral restrooms, prayer rooms, locking systems, security cameras, motion sensors, and more.

Many smaller pieces go into creating a great environment for students now and into the future.

Student Services and Amenities

Student services programs create an additional expense. These programs support students in overcoming barriers, including underrepresented groups, first-generation or low-income students, those with limited English proficiency, and students with disabilities or learning differences. Services can include:

•   On-campus events and workshops

•   Guest speakers

•   Tutoring services

•   Academic resources, including those in the library

•   Technology rentals

•   Career services

•   Academic advising

•   Mental and physical health services

•   Transportation

College costs may also go up due to various amenities on campuses, which can include extravagant campus gyms with lazy rivers, whirlpools, and saunas; fancy student unions and dining options; movie theaters, arcades, ski resorts, swanky condo-like residence halls, and more.

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Administrative Costs and Staffing

Administrative costs and staffing are another reason why U.S. colleges are so expensive. Administrative costs refer to institutional support for those who operate the day-to-day functions of the institution, which could include the following:

•   Executive management

•   Legal department

•   Fiscal operations

•   Public relations

•   Development office

The American Council of Trustees and Alumni survey found the following per-student administrative costs:

•   Oklahoma: $1,970

•   Hawaii: $2,230

•   Tennessee: $2,450

•   New Jersey: $4,982

•   Alaska: $6,224

•   Wyoming: $7,830

Colleges and universities must also cover auxiliary expenses (including parking facilities, housing, and food services).

Cost of Technology Integration

The pandemic increased the costs of student information systems after declining in previous decades. A large university with 20,000 or more full-time students might spend between $30 million and $100 million during the first five years of a new system.

Naturally, the cost of implementation depends on a few factors, including:

•   School size

•   Data processing

•   Hiring requirements to manage the technology

•   Data migration and implementation

•   Customization preferences

•   Third-party integrations

Recommended: Paying for College With No Money in Your Savings

Role of State Funding Cuts

State funding cuts for higher education are a key factor in rising college costs. While state appropriations for colleges saw overall gains year over year, 28 states have in fact cut their support for higher education.

As states reduce financial support for public universities, institutions raise tuition to cover budget shortfalls. This shift places more of the financial burden on students, contributing significantly to the overall expense of college.

Additional Expenses for Students

Students also pay for additional expenses, such as the costs of living on campus, textbooks, course materials, and tuition increases. We’ll walk through each cost below.

Recommended: What Is the Cost of Attendance in College?

Cost of Housing and Living

Housing and living costs vary depending on whether you choose to live on or off campus. Here are the differences between living off-campus versus on-campus:

•   Off-campus: The median monthly cost of rent surpassed $2,000, and the average college-aged male spends an average $374.10 per month on food. Don’t forget to factor in transportation, utilities, internet, and furniture to get the full costs of living off campus.

•   On-campus: The average cost of housing and food for full-time undergraduates at a public two-year in-district college was $9,970. On average, it also cost $12,770 for both public four-year in-state and out-of-state institutions and $14,650 for private, nonprofit four-year institutions.

Ultimately, you may pay far more for on-campus housing, but consider the tradeoff between living on campus vs living off campus. Living off campus can have its disadvantages, despite the cost savings.

Textbooks and Course Materials

Unfortunately, textbooks and course materials have gone up dramatically over the past two decades. Textbook costs have increased 162%. Students paid the most at public two-year colleges ($1,470) versus at public and private four-year colleges ($1,250).

Students might also avoid buying course materials due to these steep prices and might even choose different classes based on high textbook or supply costs.

Tuition and Fee Increases Year-Over-Year

Tuition and fees usually increase from year to year, and scholarships often don’t increase to match.

The average 2023-2024 tuition and fees for college students increased by the following percentages for full-time students:

•   Public four-year colleges for in-state students: 2.5%, for an average of $11,260

•   Public four-year colleges for out-of-state students: 3%, for an average of $29,150

•   Public two-year colleges (in district): 2.6%, for an average of $3,990

•   Private nonprofit four-year colleges: 4%, for an average of $41,540

There’s nothing students can do to change the tuition increases, so you must learn other ways to compensate, including applying for more scholarships or having parents pay more.

Recommended: Paying for College: A Parent’s Guide

Efforts to Control College Costs

The government has attempted efforts to control college costs. The House Committee on Education and the Workforce passed the College Cost Reduction Act to change college costs for the better by adjusting the student loan and Pell Grant programs. The bill would save students at least $150 billion over a decade.

In addition, colleges themselves have tried to slow down the cost increases. However, many colleges say they can no longer afford to cut costs due to inflation (food, services, labor, and more). Therefore, many colleges use third-party consultants to identify where they can cut costs, including looking deep into their institutional operations.

The Long-Term Impact of High Costs

Many colleges have begun to see the long-term impact of high costs, including overall decreased enrollment. The U.S. has seen a waning public belief in the importance of college.

In an Edge Research survey of 1,700 high school juniors and seniors and more than 3,100 non-enrolled adults aged 18 to 30, the majority of respondents still see the benefits of college. However, compared to results from last year, the rate of perceived importance has gone down by as much as six percentage points. Adults not currently enrolled in college were less likely to believe in the benefits of college than high schoolers.

The Takeaway

Asking why colleges are so expensive opens up a whole Pandora’s box of reasons — it’s impossible to pinpoint just one. College administrative offices must work hard to balance and manage costs.

Unfortunately, families bear the brunt of the costs, but learning how to pay for college can go a long way in helping you understand what to do. Options for paying for college include cash savings, scholarships, grants, and federal and private student loans. Federal loans should be pursued first, as they come with federal benefits, protections, and income-driven repayment plans.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

FAQ

What is the most expensive part of going to college?

Tuition, the price you pay for teaching or instruction from a college or university, is the most expensive part of going to college. According to the Education Data Initiative, the average cost of tuition at a public, four-year institution is $9,750. At a four-year out-of-state institution, students spend an average of $28,386 on tuition, and at a four-year nonprofit private institution, that number averages $38,421.

Why do private colleges cost more than public?

Private colleges cost more than public universities because they rely on donations, an endowment, and tuition to keep them running. However, most private colleges offer generous financial aid awards for students to bring costs down. Public institutions, on the other hand, rely on state government funding, which can help alleviate the cost burden for families.

How can students reduce the cost of college?

Students can reduce college costs by applying for merit-based and institutional scholarships and by looking for other types of aid, such as grants. Scholarships and grants are free money that you don’t have to repay, unlike loans, which you do need to repay after you graduate.

Students can also look into jobs that pay for your degree, which offer a huge benefit because some jobs will completely take care of your tuition bill.

Are online degrees a cheaper alternative?

Online degrees can be a cheaper option, but it’s important to figure out what kind of college experience you’re looking for. Getting an online degree is a vastly different experience from attending college in person. Therefore, sometimes it’s worth paying extra to get the experience you desire, rather than just “getting through college.”

Photo credit: iStock/Ibrahim Akcengiz

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SOISL-Q324-032

It’s pretty easy to rollover your old 401(k) retirement savings to an individual retirement account (IRA), a new 401(k), or another option — yet millions of workers either forget to rollover their hard-won retirement savings, or they lose track of the accounts. Given that a 401(k) rollover typically takes minimal time and, these days, minimal paperwork, it makes sense to know the basics so you can rescue your 401(k), roll it over to a new account, and add to your future financial security.

Whether you’re starting a new job and need to roll over your 401(k), or are looking at what other options are available to you, here’s a rundown of what you need to know.

401(k) Rollover Options

For workers who have a 401(k) and are considering next steps for those retirement funds — such as rolling them to an IRA or another 401(k), here are some potential avenues.

1. Roll Over Money to a New 401(k) Plan

If your new job offers a 401(k) or similar plan, rolling your old 401(k) funds into your new 401(k) account may be both the simplest and best option — and the one least likely to lead to a tax headache.

That said, how you go about the rollover has a pretty major impact on how much effort and paperwork is involved, which is why it’s important to understand the difference between direct and indirect transfers.

Here are the two main options you’ll have if you’re moving your 401(k) funds from one company-sponsored retirement account to another.

Direct Rollover

A direct transfer, or direct rollover, is exactly what it sounds like: The money moves directly from your old account to the new one. In other words, you never have access to the money, which means you don’t have to worry about any tax withholdings or other liabilities.

Depending on your account custodian(s), this transfer may all be done digitally via ACH transfer, or you may receive a paper check made payable to the new account. Either way, this is considered the simplest option, and one that keeps your retirement fund intact and growing with the least possible interruption.

Indirect Rollover

Another viable, but more complex, option, is to do an indirect transfer or rollover, in which you cash out the account with the expressed intent of immediately reinvesting it into another retirement fund, whether that’s your new company’s 401(k) or an IRA (see above).

But here’s the tricky part: Since you’ll actually have the cash in hand, the government requires your account custodian to withhold a mandatory 20% tax. And although you’ll get that 20% back in the form of a tax exemption later, you do have to make up the 20% out of pocket and deposit the full amount into your new retirement account within 60 days.

For example, say you have $50,000 in your old 401(k). If you elected to do an indirect transfer, your custodian would cut you a check for only $40,000, thanks to the mandatory 20% tax withholding.

But in order to avoid fees and penalties, you’d still need to deposit the full $50,000 into your new retirement account, including $10,000 out of your own pocket. In addition, if you retain any funds from the rollover, they may be subject to an additional 10% penalty for early withdrawal.

Pros and Cons of Rolling Over to a New 401(k)

With all of that in mind, rolling over your money into a new 401(k) has some pros and cons:

2. Roll Over Your 401(k) to an IRA

If your new job doesn’t offer a 401(k) or other company-sponsored account like a 403(b), you still have options that’ll keep you from bearing a heavy tax burden. Namely, you can roll your 401(k) into an IRA.

The entire procedure essentially boils down to three steps:

1. Open a new IRA that will accept rollover funds.

2. Contact the company that currently holds your 401(k) funds and fill out their transfer forms using the account information of your newly opened IRA. You should receive essential information about your benefits when you leave your current position. If you’ve lost track of that information, you can contact the plan sponsor or the company HR department.

3. Once your money is transferred, you can reinvest the money as you see fit. Or you can hire an advisor to help you set up your new portfolio. It also may be possible to resume making deposits/contributions to your rollover IRA.

Pros and Cons of Rolling Over to an IRA

This option also has its pros and cons, however.

3. Leave Your 401(k) With Your Former Employer

Leaving your 401(k) be – or, with your former employer – is also an option.

If you’re happy with your portfolio mix and you have a substantial amount of cash stashed in there already, it might behoove you to leave your 401(k) where it is.

You’ll also want to dig into the details and determine how much control you’ll have over the account, and how much your former employer might.

You might also consider any additional fees you might end up paying if you leave your 401(k) where it is. Plus, racking up multiple 401(k)s as you change jobs could lead to a more complicated withdrawal schedule at retirement.

Pros and Cons of Leaving Your 401(k) Alone

4. Cash Out Your Old 401(k)

Cashing out, or liquidating your old 401(k) is another option. But there are some stipulations investors should be aware of.

Because a 401(k) is an investment account designed specifically for retirement, and comes with certain tax benefits — e.g. you don’t pay any tax on the money you contribute to your 401(k), depending on the specific type — the account is also subject to strict rules regarding when you can actually access the money, and the tax you’d owe when you did.

Specifically, if you take out or borrow money from your 401(k) before age 59 ½, you’ll likely be subject to an additional 10% tax penalty on the full amount of your withdrawal — and that’s on top of the regular income taxes you’ll also be obligated to pay on the money.

Depending on your income tax bracket, that means an early withdrawal from your 401(k) could really cost you, not to mention possibly leaving you without a nest egg to help secure your future.

This is why most financial professionals generally recommend one of the next two options: rolling your account over into a new 401(k), or an IRA if your new job doesn’t offer a 401(k) plan.

Pros and Cons of Cashing Out Your 401(k)

When Is a Good Time to Roll Over a 401(k)?

If there’s a good time to roll over your 401(k), it’s when you change jobs and have the chance to enroll in your new employer’s plan. But you can generally do a rollover any time.

That said, if you have a low balance in your 401(k) account — for example, less than $5,000 — your employer might require you to do a rollover. And if you have a balance lower than $1,000, your employer may have the right to cash it out without your approval. Be sure to check the exact terms with your employer.

When you receive funds from a 401(k) or IRA account, such as with an indirect transfer, you’ll only have 60 days from the date you receive them to then roll them over into a new qualified plan. If you wait longer than 60 days to deposit the money, it will trigger tax consequences, and possibly a penalty. In addition, only one rollover to or from the same IRA plan is allowed per year.

The Takeaway

Rolling over your 401(k) — to a new employer’s plan, or to an IRA — gives you more control over your retirement funds, and could also give you more investment choices. It’s not difficult to rollover your 401(k), and doing so can offer you a number of advantages. First of all, when you leave a job you may lose certain benefits and terms that applied to your 401(k) while you were an employee. Once you move on, you may pay more in account fees for that account, and you will likely lose the ability to keep contributing to your account.

There are some instances where you may not want to do a rollover, for instance when you own a lot of your old company’s stock, so be sure to think through your options.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

FAQ

How can you roll over a 401(k)?

It’s fairly easy to roll over a 401(k). First decide where you want to open your rollover account, then contact your old plan’s administrator, or your former HR department. They typically send funds to the new institution directly via an ACH transfer or a check.

What options are available for rolling over a 401(k)?

There are several options for rolling over a 401(k), including transferring your savings to a traditional IRA, or to the 401(k) at your new job. You can also leave the account where it is, although this may incur additional fees. It’s generally not advisable to cash out a 401(k), as replacing that retirement money could be challenging.

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