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Unsecured personal loans are loans provided by banks, credit unions, and online lenders that do not require any type of collateral. They provide an opportunity to borrow funds without putting any of your assets (like your home or car) at risk. The funds can be used for virtually any purpose, including debt consolidation, home improvements, and large purchases.

How do you know if an unsecured personal loan is the right choice for you? We’ll dive into exactly what an unsecured personal loan is, the benefits of an unsecured personal loan, and how to choose the best loan for your situation.

What Is an Unsecured Loan?

An unsecured loan is a loan that is not backed by collateral, such as your home, bank account balances, or vehicle. To have a loan “backed” by an asset means that a bank or lender has the right to take that asset in the event of default on the loan.

Loans backed by collateral (such as mortgages, home equity loans, and auto loans) generally pose less risk to lenders — if the borrower defaults, they can recoup the balance due by seizing the collateralized property. Because unsecured loans pose a higher risk, they tend to have higher interest rates and come in lower loan amounts compared to secured loans.

Some borrowers, however, prefer unsecured loans, since they don’t require you to put your home, car, or other personal assets at risk. You qualify for an unsecured personal loan strictly on your ability to repay the borrowed amount. Lenders assess this by looking at your income, credit scores, and borrowing history.


💡 Quick Tip: Some personal loan lenders can release your funds as quickly as the same day your loan is approved.

What Are Common Uses for Unsecured Personal Loans?

Unsecured personal loans can be used for a wide array of purposes. Here are some of the most common reasons why people take out unsecured personal loans.

Credit Card Payoff

Credit cards tend to have high annual percentage rates (APRs). Currently, the average credit card interest rate is 28.02%. Personal loans, on the other hand, charge an average interest rate of 11.31 (if you have a high credit score, you may be able to get a lower APR).

Using a personal loan to pay off credit card debt can potentially help you save money on interest. You can get an estimate of the potential savings of using an unsecured personal loan to pay off a credit card balance by using a personal loan calculator.

Debt Consolidation

If you make many different credit card (or other debt) payments every month, it can be difficult to keep track of all the due dates and minimum amounts owed. If you miss a payment or don’t pay at least the amount due, you can get hit with late fees and your credit could be negatively affected.

Debt consolidation is the process of taking out an unsecured personal loan and using it to pay off multiple debts, leaving you with just one monthly payment. This simplifies repayment and, if you get a loan with a lower interest rate, could also help you save money.

Medical Expenses

Unsecured personal loans can be used to pay for a range of medical treatments, including elective procedures, fertility treatments, prescriptions, surgeries, dental procedures, and more.

A number of lenders, including certain banks, credit unions and online lenders, offer personal loans that can be used for medical expenses. Though interest expenses will add to the total cost of treatment, this can be a less expensive option than putting the medical expense on your credit card.

Home Projects

Whether you’re thinking about updating your kitchen or renovating a bathroom, you may be able to use an unsecured personal loan, also called a home improvement loan, to obtain funding for the project.

An unsecured personal loan can be especially useful if you need cash quickly for critical repairs or emergencies. It also provides an alternative to taking out a home equity loan or line of credit for remodeling or repairs, both of which are secured loans and require equity in your home.

What Are Some Different Types of Unsecured Loans?

The most common types of unsecured loans include:

•   Personal loans Personal loans are typically unsecured, though some lenders offer secured options. Loan amounts range from $1,000 to $50,000, with repayment terms of two to seven years. Interest rates are typically fixed.

•   Personal lines of credit A personal line of credit is a revolving loan, which means the loan can be spent, repaid, and spent again, similar to a credit card. While some credit lines are secured, many lenders offer unsecured options. Personal credit lines typically have a variable interest rate.

•   Student loans Education loans are used to cover the cost of college tuition and expenses. Both federal and private student loans are unsecured. However, student loans usually carry more restrictions and payback instructions than other types of unsecured loans.

•   Credit cards Like a personal credit line, credit cards are a type of revolving loan that lets you access money up to a certain limit as you need it and only pay interest on the amount you borrow. While secured credit cards are available, most consumer cards do not require collateral.

Why Choose an Unsecured Personal Loan?

Here’s a look at some of the benefits of unsecured personal loans.

•   Fast processing time It often doesn’t take long to get the lump sum of money in your hands — often just a few days or so.

•   Consistent payments Personal loans are a type of installment loan, which means payments will be fixed and follow a set schedule.

•   Less costly than credit cards With good credit, interest rates on unsecured personal loans are typically lower than interest rates on credit cards.

•   Flexibility An unsecured personal loan can be used for almost any purpose, including credit card consolidation, a large purchase (like an appliance), a wedding, travel, medical expenses, home repairs, and more.

•   No collateral You don’t need to put anything of value at risk of repossession in order to secure the loan.

Applying for an Unsecured Personal Loan

Before you apply for an unsecured personal loan it’s a good idea to check your credit score, since it will play a role in your loan eligibility and interest rate.

Next, you’ll want to research and compare lenders, including banks, credit unions, and online lenders. It can be a good idea to compare loan amounts, interest rates, terms, and fees. Also check loan requirements, if they are available. Some lenders have a minimum credit score or income requirements.

In some cases, you may be able to pre-qualify for a personal loan, which lets you see the loan terms you may qualify for. This involves a soft credit check, which won’t impact your credit.

Once you find a loan you like, it’s time to officially apply. Often, you can do this online, though some lenders may require you to apply in person. Either way, you’ll need to provide personal and financial information (such as your name, home address, and employment information). In addition, you may need to provide the following documents:

•   State-issued ID

•   Proof of residence

•   Proof of income (like a bank statement or pay stub)

•   Tax return

Once you submit your application, you may receive a decision within a few minutes or a few days, depending on the lender.


💡 Quick Tip: Just as there are no free lunches, there are no guaranteed loans. So beware lenders who advertise them. If they are legitimate, they need to know your creditworthiness before offering you a loan.

The Takeaway

For some of life’s many curveballs — or opportunities — the occasional need for an unsecured personal loan might come up. Unlike a secured loan (like an auto loan, mortgage, or car title loan), an unsecured personal loan doesn’t require you to provide anything of value to guarantee it. You qualify based only on your ability to repay the borrowed amount to the lender.

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.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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Staying on top of student loans and other financial obligations can be challenging. If you’re having trouble making monthly payments, or you’re concerned about how you’ll repay your loans down the road, you might be wondering what happens if you don’t pay your debt.

While you cannot be arrested or put in jail for failing to pay your student loans, there are repercussions for missing student loan payments, including damage to your credit and wage garnishment.

Here’s a look at the potential legal and financial consequences of not paying debt, as well as tips for tackling student loan debt after you graduate.

Going to Jail for Debt

No matter how much or what type of outstanding debt you have, a debt collector cannot threaten to or have you arrested for that unpaid debt. Doing so is a violation of the Fair Debt Collection Practices Act and would be considered harassment.

A lender can, however, file a lawsuit against you to collect on an outstanding debt. If the court orders you to appear or to provide certain information, but you don’t comply, a judge may issue a warrant for your arrest. A judge can also issue a warrant for your arrest if you don’t comply with a court-ordered installment plan (such as child support).

Bottom line: You never want to ignore a court order, since doing could result in an arrest and, potentially, jail time.


💡 Quick Tip: Pay down your student loans faster with SoFi reward points you earn along the way.

Can You Go to Jail for Not Paying Student Loans?

No, you can’t be arrested or put in prison for not making payments on student loan debt. The police won’t come after you if you miss a payment. While you can be sued over defaulted student loans, this would be a civil case — not a criminal one. As a result, you don’t have to worry about doing any jail time if you lose.

As mentioned above, however, ignoring an order to appear in court could result in an arrest. And, unless you want to deal with a long, messy legal process and added expenses on top of your debt (in the form of attorney and court fees), it’s in your best interest to do whatever you can to avoid defaulting on your student loans.

Statute of Limitations on Debt

In terms of debt collection, the statute of limitations refers to the amount of time that creditors have to sue borrowers for debt that’s past due.

Federal student loans don’t have a statute of limitations. This means that federal loan servicers can collect your remaining student loan balance at any point. Keep in mind that the federal government doesn’t have to sue you to start garnishing wages, tax refunds, and Social Security checks.

For other types of debt, including private student loans, many states have statutes of limitations between three and six years, but some may be longer. The timeframe can vary based on the type of debt and the state law named in your credit agreement.

If you’re sued by a debt collector and the debt is too old, you may have a defense to the lawsuit. You may also have a claim against the collector for violating the Fair Debt Collection Practices Act, which prohibits suing or threatening to sue for a debt that is past the statute of limitations.

Recommended: Private Student Loans vs Federal Student Loans

What Are the Consequences of Not Paying Off Student Loan Debt?

The consequences of not paying your student loan debt differ depending on what type of student loans you have.

Federal Student Loans

Typically, with federal student loans, the loan becomes delinquent the first day after a payment is missed. If you don’t make a payment within 90 days, your loan servicer will report the delinquency to the three national credit bureaus.

If you don’t make a payment for 270 days (roughly nine months), the loan will go into default. A default can cause long-term damage to your credit score. You may also see your federal tax refund withheld or some of your wages garnished.

Once your federal student loan is in default, you can no longer receive deferment or forbearance or any additional federal student aid. Plus, you’re no longer eligible for an income-driven repayment plan, and your lender can sue you for the money you owe.

If, however, you had student loans that were on the pandemic-related pause, there is good news: Until September 30, 2024, borrowers who miss making payments on their federal student loans won’t be penalized in the ways described above. The Biden administration is providing a 12-month “on-ramp period,” during which a borrower won’t be reported as being in default to the national credit agencies. Interest will still accrue, though, so you’re not completely off the hook.

Private Student Loans

If you don’t pay private student loans, the consequences will depend on the lender. Generally, however, this is what happens: As soon as you miss a payment, your loan will be considered delinquent. You’ll get hit with a late fee and, after 30 days, your lender can report your delinquency to major credit agencies.

After 90 days, your loan will typically go into default. At that point, your loan may be sold to a collections company. Your (and any cosigner’s) credit score will also take a hit. In addition, your lender can sue you for the money you owe. They may also be able to get a court order to garnish your wages. However, they can’t take any money from your tax refunds or Social Security checks.

Tips for Getting Out of Student Loan Debt

You won’t go to jail for not paying back your student loans, but you can still face some significant consequences for missing payments. Here are some ways to stay (or get back) on track.

1. Set up a Budget

It can be hard to manage your finances without a plan. Creating a monthly budget is a helpful way to keep your spending in check and make sure you have enough money for your loan payments. Once you write down everything you’re spending on each month, you may find some easy places to cut back, such as getting rid of streaming services you rarely watch or spending less on takeout and afternoon coffees. Any money you free up can then go towards loan repayment.

2. Increase Cash Flow

Reining in your spending with a budget is a good place to start, but it may not be enough for getting out of debt. Having some extra cash on hand can help manage debt payments and offer some breathing room within your monthly budget.

To boost your income, you might consider taking on more hours at your current job, getting some freelance work, or picking up a side gig (such as food delivery, dog walking, or babysitting). You don’t have to do this forever — just until your student debt is paid off, or at least well under control.

3. Create a Debt Reduction Plan

If you have multiple debts, it’s a good idea to take an inventory of everything you owe and then set up a comprehensive debt reduction plan.

A popular system is the avalanche method, which calls for putting any extra cash toward the debt with the highest interest rate while making minimum payments on other balances. When that debt is paid off, you put your extra money towards the debt with the next-highest interest rate, and so on.

Another option is the snowball method, which focuses on ticking off debts in order of size, starting with the smallest debt balance, while still taking care of minimum payments on other debt.

4. Apply for an Income-Based Repayment Plan

If you have federal student loans, there are four income-driven repayment plans you can apply for to make your monthly payments more manageable. These include:

•   Saving on a Valuable Education Plan (SAVE; replacing Revised Pay As You Earn)

•   Pay As You Earn

•   Income-Based Repayment Plan

•   Income-Contingent Repayment Plan

Monthly payments are a percentage of your discretionary income, usually 10% or 20%. What’s more, all four plans forgive any remaining balance at the end of the 20- or 25-year repayment period. Note that in some situations, you may be required to pay taxes on the forgiven amount, according to IRS rules.

5. Find Another Repayment Plan

Besides income-based repayment, borrowers can explore a variety of other federal repayment plans to help pay off debt. For example, the graduated repayment plan helps recent college grads find their financial footing by setting smaller monthly payments at first before increasing every two years.

Some private lenders also offer a choice of different repayment options.

6. Look Into Forgiveness Programs

The federal government offers student loan forgiveness to borrowers who meet certain eligibility criteria, such as working in a certain profession, having a permanent disability, or after making payments for a certain amount of time on an income-driven repayment plan. Similar programs are available at the state-level across the country, and generally base eligibility on specific professions or financial hardship.

The Rural Iowa Primary Care Loan Repayment Program, for instance, provides up to $200,000 toward repaying eligible student loans for doctors who commit to working five years in designated locations.

The NYS Get on Your Feet Loan Forgiveness Program, on the other hand, offers up to 24 months of debt relief to recent graduates in New York who are participating in a federal income-driven repayment plan.

7. Ask About Employer Tuition Reimbursement Programs

Besides health insurance and a 401(k), your employer may provide other benefits, including tuition reimbursement programs, to support and retain their employees.

Often, these programs are focused on annual tuition expenses that employees incur while studying and working concurrently. Still, employers may offer to contribute to student loan payments as well.


💡 Quick Tip: Master’s degree or graduate certificate? Private or federal student loans can smooth the path to either goal.

8. Explore Refinancing Your Student Loans

Student loan refinancing could help you save interest and make your monthly payments easier to manage. Generally, though, refinancing only makes sense if you can qualify for a lower interest rate.

Refinancing involves taking out a new loan with a private lender and using it to pay off your existing federal or private student loans. You can often shop around and “browse rates” without any impact to your credit scores (prequalifying typically involves a soft credit check). Just keep in mind that refinancing federal loans with a private lender means losing access to government protections like income-driven repayment plans, student loan forgiveness programs, and deferment and forbearance.

Also know that lenders typically require your loans to be in good standing before approving a refinance. That means you generally can’t refinance a student loan in default. You can, however, consider refinancing after recovering from a student loan default.

The Takeaway

Although you won’t go to jail for failing to pay your student loans, there are a number of negative consequences, like late fees, a damaged credit score, wage garnishment, and even being taken to court. The current “on ramp” to repayment of federal student loans, however, removes these consequences until September 30, 2024.

Whatever type of student loan you have, you can help the road to repayment go smoothly by setting up a budget that makes room for monthly loan payments, picking a repayment plan that fits your needs and budget, and investigating forgiveness options.

Finding a student loan with a competitive interest rate and flexible repayment terms can help avoid the stress and repercussions of not paying student loans down the line.

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

Do student loans go away after 7 years?

No, student loans won’t disappear after seven years. Negative information about your student loans (such as late payments or defaulting on a loan) will be removed from your credit report after seven years, but the loans themselves will stay on your reports until you pay them off or have them forgiven.

Many states have statutes of limitations of between three and six years to prevent creditors and debt collectors from using legal action to collect on older debts. However, federal student loans don’t have a statute of limitations.

How long before student loans are forgiven?

The Public Service Forgiveness Program requires making the equivalent of 120 qualifying monthly payments under an accepted repayment plan (while working full-time for an eligible employer) for student loan forgiveness. With an income-based repayment plan, you need to make payments for 20 to 25 years to have the remaining balance forgiven. State programs may offer more rapid repayment assistance and forgiveness.

Can student loans seize bank accounts?

Yes, but not right away. If you have federal student loans, your wages or bank accounts can be garnished only if you have officially defaulted on your loans (i.e., you haven’t made a payment for at least 270 days). The government does not need a court order or judgment to garnish your wages.

If you default on a private student loan, your creditor must first sue you to obtain a judgment and submit a court order to your employer before your wages can be garnished.

Photo credit: iStock/shadrin_andrey

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

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.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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.

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A merit scholarship is a type of college financial aid that is awarded based on a student’s merits, which might be academic, athletic, artistic, leadership-related, or pertaining to a special interest. A merit scholarship does not take a student’s financial need into consideration.

Read on for a closer look at exactly what a merit scholarship is, the different types of merit scholarships available, and how to get merit aid to help you pay for college.

What Is a Merit Scholarship?

Merit scholarships, also known as merit aid, are a kind of college funding that is not based on financial need but, instead, on a student’s merits or achievements. Merit aid is often given to students that excel in academics, extracurricular activities, athletics, arts leadership, and other areas.

Merit aid is often funded by colleges and universities themselves, and can typically be redeemed for multiple semesters and years. This type of financial aid is often used as a way to lure top performing students to their school. It might be a few thousand dollars or it could cover a student’s entire tuition. Merit scholarships are also offered by organizations, like the National Merit Scholarship Corporation, and private companies.


💡 Quick Tip: Fund your education with a low-rate, no-fee SoFi private student loan that covers all school-certified costs.

Types of Merit Scholarships

Merit scholarships come from different types of institutions and are awarded for a variety of reasons. Here’s a look at the different kinds of merit scholarships that are available.

Colleges and Universities

Many colleges and universities have merit aid awards that are offered to students. Sometimes referred to as institutional aid, merit aid programs vary from school to school. Some schools may consider all students for a merit award without needing an additional application. In some cases, there may be an additional application required. Select merit aid awards may be designed to cover the full cost of tuition, while others will only cover a portion.

Academic Merit Scholarships

Academic merit scholarships award money to students who demonstrate significant academic achievement in high school. Often, academic merit scholarships may consider a student’s grade point average (GPA), standardized test scores, class rank, or other factors.

Depending on the school, you may not need to submit or do anything extra to be awarded a merit-based scholarship. Instead, the school may decide based on your application alone. Academic merit aid is often redeemable for multiple years if you uphold the scholarship qualifications (such as maintaining a certain GPA each semester).

Recommended: How Much Does GPA Matter When Applying to College?

Athletic Merit Scholarships

Like academic merit aid, athletic merit scholarships are typically funded by the college or university. If you’re interested in an athletic scholarship, keep in mind that getting recruited can be a time-intensive process. Depending on the sport you play, you may need a highlight reel or video that shows off your skills. Typically, schools will also want to see your academic records and SAT or ACT scores.

Athletic scholarships may be offered for each year you attend school, provided you meet certain requirements, such as attending a certain number of practices/games each week while also maintaining a certain GPA.

Arts Merit Scholarships

Many liberal arts colleges offer merit scholarships to students who excel in the arts, such as music, acting, painting, drawing, or graphic design. If you have talent in and have been focusing on any area of the arts, you may be able to get merit money by applying for a degree program in the arts at a particular college or university.

Merit Scholarship Options From Organizations

Some nonprofits and community organizations offer their own merit scholarships to standout students. These scholarships have varying requirements but will typically focus on an eligibility requirement that’s important to the organization, such as a student’s leadership qualities, chosen career path, or involvement in community service during high school.

For example:

•   The Daughters of the American Revolution (DAR) offers the Richard and Elizabeth Dean Scholarship to students who are pursuing an undergraduate degree in American Studies.

•   The Society of Women Engineers (SWE) offers a scholarship to applicants who are studying at an accredited university and pursuing a career path in engineering, engineering technology, or computer science.

•   The National Association of Flavors and Food-Ingredient Systems (NAFFS) offers an annual scholarship to outstanding food science students.

Private Companies

Another source of merit scholarships is private companies. Companies like Coca-Cola, Burger King, Google, and more have annual scholarships. Like many other scholarship opportunities, the application requirements and eligibility criteria will vary based on the company and/or scholarship. Below are a few examples.

Coca-Cola Scholars Program

The Coca-Cola Scholars Program
is an achievement-based scholarship awarded to students in their final year of high school. Students are recognized for their ability to lead and serve, as well as their commitment to making a significant impact on their schools and communities. In 2023, the program provided over 6,750 Coca-Cola Scholars with more than $81 million in educational support.

Burger King Scholars

The Burger King Scholars program provides scholarships ranging from $1,000 to $60,000 to high school students who stand out based on their GPA, work experience, extracurricular activities, and community service.

Generation Google Scholarship

The Generation Google Scholarship program is designed for students pursuing degrees in computer science. The scholarship is awarded based on the strength of each candidate’s commitment to diversity, equity, and inclusion; demonstrated leadership; and academic performance. Selected students can receive $10,000 for college.

National Merit Scholarship Corporation

The National Merit Scholarship Program is an annual academic competition among high school students for recognition and college scholarships run by the nonprofit National Merit Scholarship Corporation (NMSC). To enter the program, you simply need to take the Preliminary SAT/National Merit Scholarship Qualifying Test, generally during your junior year, and meet other program entry requirements. There are three types of awards: National Merit Scholarships of $2,500, corporate-sponsored scholarships, and college-sponsored merit scholarships.

Recommended: Finding Free Money for College

How to Apply for a Merit Scholarship

The process for applying to a merit scholarship can vary significantly from scholarship to scholarship. Merit scholarships offered by colleges and universities typically don’t require students to fill out any additional paperwork beyond their application to the school. However, some schools require that students submit the Free Application for Federal Student Aid (FAFSA) to be eligible. This allows students to maximize their federal and state need-based financial aid before receiving school awards. It’s a good idea to contact the financial aid department for each school and ask what their merit scholarship process is.

Applying for merit aid from a source other than your school can be more time-consuming and will likely vary depending on the organization offering the award. In addition to an application detailing basic personal information, students may be required to write an essay or personal statement, gather letters of recommendation or go through an interview process.

If you’re interested in applying for a private merit scholarship, check in with the organization directly so you can be sure that you understand exactly what the application requirements are.

Recommended: Grants For College — Find Free Money for Students

What Can Merit Scholarships Pay For?

Frequently, if the merit scholarship is offered by the school, the award will go directly to pay your tuition bills. If there is any money left over after tuition is paid for, it can be used to pay for other educational expenses including room and board, books, or other fees. Each school will have its own procedures for how merit aid is awarded to students, so confirm any questions directly with the financial aid office.

Merit Scholarships and Income Taxes

Generally speaking, merit scholarships are not taxed by the Internal Revenue Service (IRS). According to the IRS, scholarships and grants are considered tax-free so long as the following conditions are met:

•   The student is pursuing a degree at an educational institution; and

•   The award money is used to pay for tuition and fees or other expenses related requirements at the educational institution, such as fees, books, and supplies.

There are some situations in which a merit scholarship may be taxed. If a grant or scholarship meets the following criteria, it may be taxable, according to the IRS:

•   The scholarship is used to pay for incidental expenses such as room and board, travel, or optional equipment.

•   The scholarship is awarded as payment for teaching, research, or other services (though there are some exceptions).

If you have any questions about whether or not a scholarship you’ve received is considered taxable income, consider consulting with a tax professional who can provide advice specific to your personal circumstances.

Recommended: Are Scholarships Taxable?

Finding Merit Scholarships

Check in with your college or university to find out if there are any school-specific awards available and determine how to file an application (if an additional application is required). There are numerous online resources and databases that can help you identify merit-based scholarships across the U.S. For students who are pursuing graduate degrees, there are also some scholarships for graduate students.

It can be a good idea to make a running list or spreadsheet of all of the merit-based scholarships that you are interested in, so you can keep the specific due dates and application requirements organized. This can help make the application process feel less overwhelming.

Consider Starting Early

Many merit-based scholarships look for demonstrated excellence over the course of an applicant’s entire four years of high school. Therefore, it could be a good idea to start thinking about what types of merit scholarships you’re interested in applying for as early as possible.

Maintaining Your Scholarship

It is important to note that some merit-based scholarships require the scholarship recipient to maintain a certain GPA and/or require specific campus or community involvement to continue receiving consistent scholarship funding.

If you do decide to apply for a merit-based scholarship, it’s a good idea to be prepared to not only do the hard work to secure the scholarship but also maintain it once you get to campus.

Other Ways to Help Finance College Tuition

If you do not receive any merit aid or enough merit aid to fully cover your college costs, there are still many funding options available to you. Often, the first step for students looking to secure aid is to fill out the FAFSA. Students must fill this out in order to receive any federal aid, including federal grants and scholarships, work-study, and federal student loans.

The federal work-study program sets students up with part-time jobs where they can earn money to put towards their educational costs.

Federal student loans offer low fixed interest rates, flexible repayment options, and possible forgiveness programs. Depending on your level of need, you may qualify for either subsidized or unsubsidized federal student loans. With a subsidized loan (for undergrads only), the federal government pays for any accruing interest on your loans while you’re in school and for six months after you graduate; with an unsubsidized loan, you are responsible for paying all interest that accrues on the loan.

If federal aid and merit-based scholarships aren’t enough to cover the cost of college, you might consider getting a private student loan. These loans are offered by banks, credit unions, and online lenders. Students and their co-signers (if applicable) apply for private student loans as if they were applying for other types of loans, such as auto and home loans.

Private student lenders are able to determine their own term lengths, interest rates, and repayment plans. Because these loans don’t come with the same borrower protections as federal student loans (such as income-based repayment plans and generous forbearance and deferment programs), you generally only want to consider private student loans after you’ve fully tapped federal aid options, including federal student loans.


💡 Quick Tip: It’s a good idea to understand the pros and cons of private student loans and federal student loans before committing to them.

The Takeaway

Merit scholarships are awarded to students based on merit alone, which might be academic, athletic, artistic, or in another specialized area. This money typically does not need to be repaid by student recipients. Some sources for merit scholarships include your college or university, nonprofit organizations, private companies, and the National Merit Scholarship Corporation.

Other options for college funding include financial aid (which includes need-based grants and federal student loans) and private student loans.

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.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

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.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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If you borrowed money from the government to help pay for college, the time will come when you need to pay your student loans back. That time typically arrives six months after you graduate or drop below half-time status.

While the prospect of paying student debt may seem daunting while you’re a student with little to no income, don’t stress. The U.S. Department of Education offers a number of repayment options, including plans that only require you to pay a small percentage of your monthly salary. Plus, there are steps you can take to make it easier to repay your student loans and potentially save money on interest.

Read on to learn how to start paying off student loans.

Paying Back Your Student Loans

You don’t need to start thinking about paying your loans while you’re enrolled in school at least half-time, and for six months after you graduate (which is called the grace period).

Unless your loans are subsidized by the federal government, however, interest will accrue during that entire period of time. That interest gets added to your loan balance, or capitalized, when repayment begins. As a result, your balance will be larger after you graduate than the amount you initially borrowed. You’ll also be paying interest on that larger balance moving forward.

If you have some income as a student (and have unsubsidized loans), you might choose to make monthly interest payments while you’re in school, or to make a lump-sum interest payment before your grace period ends. This will leave you with a smaller balance to pay off once your repayment period officially begins and can help you save money on interest. However, this is not required.


💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.

Types of Student Loans

To determine the right student loan repayment strategy, it’s important to know what type of student loans you have. Here’s a look at the main types of federal student loans.

Direct Subsidized Loans

Direct Subsidized Loans are a type of federal student loan only for undergraduates who have demonstrated financial need. With these loans, the government pays the interest on the loan while you are in school and during the grace period.

Direct Unsubsidized Loans

Direct Unsubsidized Loans are available to eligible undergraduate, graduate, and professional students, and eligibility is not based upon financial need. Borrowers are responsible for all interest that accrues on the loan.

Direct PLUS Loan

Direct PLUS Loans are federal loans that graduate or professional students and parents of dependent undergraduate students can use to help pay for education expenses. These loans are unsubsidized, meaning that interest accrues throughout the life of the loan, including while the student is enrolled in school.

When Do You Have to Pay Back Federal Student Loans?

You need to begin paying back most federal student loans six months after you leave college or drop below half-time enrollment.

Direct PLUS loans enter repayment once your loan is fully disbursed. However graduate/professional students who take out PLUS loans get an automatic deferment, which means they don’t have to make payments while they are in school at least half time, and for an additional six months after they graduate.

If you’re a parent PLUS loan borrower, you can request a deferment (it’s not automatic). This deferment means you won’t have to pay while your child is enrolled at least half time, and for an additional six months after your child leaves school or drops below half-time status.

How Do I Pay Back My Federal Student Loans?

When you leave school, you’ll be required to complete exit counseling. This is an online program offered by the government that helps you prepare to repay your federal student loans. You’ll then have the option to pick a repayment plan. If you don’t choose a specific plan, you’ll automatically be placed on the 10-year standard repayment plan. However, you can change plans at any time once you’ve begun paying down your loans.

Your federal loan servicer will provide you with a loan repayment schedule that tells you when your first payment is due, the number and frequency of payments, and the amount of each payment.

Your billing statement will tell you how much you need to pay. If you signed up for electronic communication, you’ll want to pay attention to your email. Most loan servicers send an email when your billing statement is ready for you to access online.

You might also consider signing up for autopay through your loan servicer. Since your payments will be automatically taken from your bank account, you won’t have to worry about missing a payment or getting hit with a late fee. Plus, you’ll receive a 0.25% interest rate deduction on your loan.

Choosing a Loan Repayment Plan

To repay your loan, you’ll need to pick a repayment plan. Here’s a look at your options, plus tips on why you might choose one plan over another.

The Standard Repayment Plan

The Standard Repayment Plan is the default loan repayment plan for federal student loans. Under this plan, you pay a fixed amount every month for up to 10 years (between 10 and 30 years for consolidation loans). This can be a good option for borrowers who want to pay less interest over time.

The Extended Repayment Plan

The Extended Repayment Plan is similar to the Standard Repayment plan, but the term of the loan is longer. Extended Repayment plans generally have terms of up to 25 years. The longer term allows for lower monthly payments, but you may end up paying more over the life of your loan thanks to additional interest charges.

The Graduated Repayment Plan

The Graduated Repayment Plan starts with lower payments that increase every two years. Payments are made for up to 10 years (between 10 and 30 years for consolidation loans). If your income is low now but you expect it to increase steadily over time, this plan might be right for you.

The Income-Driven Repayment Plan

With income-driven repayment plans (IDRs), the amount you pay each month on your student loans is tied to the amount of money you make, so you never need to pay more than you can reasonably afford. Generally, your payment amount under an IDR plan is a percentage of your discretionary income (typically 5% to 10%).

Under all IDR plans, any remaining loan balance is forgiven if your federal student loans aren’t fully repaid at the end of the repayment period (either 20 or 25 years).

There are currently two IDR plans accepting new enrollments:

•   Saving on a Valuable Education (SAVE) Plan—formerly the REPAYE Plan

•   Income-Based Repayment (IBR) Plan

IDR can be a good option if you’re having difficulty meeting your monthly payment and need something more manageable.

Consolidating Your Loans

If you have multiple federal student loans, you have the option of consolidating them into a single Direct Consolidation Loan. This might simplify repayment if you are currently making separate loan payments to different loan servicers, since you’ll only have one monthly payment to make. In addition, a Direct Consolidation Loan could make you eligible for more repayment plans than your current loans are eligible for.

Federal loan consolidation will not lower your interest rate, however. The fixed interest rate for a Direct Consolidation Loan is the weighted average of the interest rates of the loans being consolidated, rounded up to the nearest one-eighth of a percent. It might also extend your repayment term, which can result in paying more interest over the life of the loan.

Refinancing Student Loans

When you refinance your student loans, you combine your federal and/or private loans into one private loan with a single monthly payment. This can simplify repayment and might be a smart move if your credit score and income can qualify you for lower interest rates.

With a refinance, you can also choose a shorter repayment term to pay off your loan faster. Or, you can go with a longer repayment term to lower your monthly payments (note: you may pay more interest over the life of the loan if you refinance with an extended term).

If you’re considering a refinance, keep in mind that refinancing federal loans with a private lender disqualifies you from government benefits and protections, such as IDR plans and generous forbearance and deferment programs.


💡 Quick Tip: Refinancing could be a great choice for working graduates who have higher-interest graduate PLUS loans, Direct Unsubsidized Loans, and/or private loans.

The Takeaway

If you have federal student loans, you generally don’t need to start paying them down until six months after you graduate. At that point, you’ll have the opportunity to choose a repayment plan that fits your financial situation and goals. Whatever plan you choose, you’re never locked in. As your finances and life circumstances change, you may decide to switch to a different payment plan, consolidate, or refinance your student loans.

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

Is there a way to get rid of federal student loans?

If you repay your loans under an income-driven repayment plan, any remaining balance on your student loans will be forgiven after you make a certain number of payments over 20 or 25 years. Other ways to pursue federal student loan forgiveness are through Public Service Loan Forgiveness and Teacher Loan Forgiveness.

What is the best option for repaying student loans?

The best federal student loan repayment plan for you will depend on your goals and financial situation. If you want to pay the least possible in interest, you might want to stick with the standard repayment plan. If, on the other hand, you want lower monthly payments and student loan forgiveness, you might be better off with income-driven repayment. If your income is high but you want lower payments, you might look into a graduated or extended repayment plan.

What can the federal government do if you do not pay back your student loans?

Typically, If you don’t make payments on your loan for 90 days, your loan servicer will report the delinquency to the three national credit bureaus. If you don’t make a payment for 270 days (roughly nine months), the loan will go into default. A default can cause long-term damage to your credit score. You may also see your federal tax refund withheld or some of your wages garnished.

If, however, you had student loans that were on the pandemic-related pause, you have a little more breathing room. There is currently a 12-month “on-ramp” period that ends on September 30, 2024. Until that time, borrowers who miss making payments on their federal student loans won’t be penalized in the ways described above. Interest will still accrue, though, so you’re not entirely off the hook.

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.

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If you’re thinking about taking out student loans to pay for college, you’re in good company: Nearly two-thirds of college graduates leave school with debt. Like most loans, student loans charge interest, which is the cost of borrowing money from a lender. Whether you take out federal or private student loans, you’ll end up paying back more than your original borrowed.

Is it worth it?

The answer depends on your degree, major, and the type and size of your debt. Read on to learn more about whether the current cost of college is worth it, different ways to pay for school, and when it makes sense to take out student loans.

College Costs Vary By School

It’s no secret that college costs have gone up over the years, causing more students to take on debt as a means to afford a college education. Indeed, student debt has more than doubled over the last two decades. As of March 2023, about 44 million U.S. borrowers collectively owed more than $1.7 trillion in federal and private student loans.

But not all schools cost the same amount. In fact, some colleges cost considerably less than others. According to Educationdata.org, the average cost of attendance for a student living on campus at a public four-year in-state college is $26,027 per year; out-of-state students pay $27,091 per year. The average cost of attending a private, nonprofit university, by contrast, is $55,840 per year.


💡 Quick Tip: You can fund your education with a low-rate, no-fee private student loan that covers all school-certified costs.

Factoring in Financial Aid

Financial aid is another factor that affects the cost of going to college. Some schools may have a high sticker price but offer a variety of need- and merit-based aid options to students, which can lower the actual cost of attendance.

Colleges and universities will frequently publish what percentage of their students receive financial aid and will sometimes also publish the average award amount. This can be helpful information for students applying to colleges.

When deciding where to apply and attend school, keep in mind that while the sticker price for College A is more expensive than College B, the financial aid package at College A may make it a more affordable option in the end.

Not All Majors Have the Same Income Potential

Another consideration when evaluating whether borrowing student loans is worth it is to factor in the earning potential based on your selected major, keeping in mind that not all majors offer the same income potential.

For example, undergraduate degrees in computer and information science and software engineering net recent grads a median salary over $127,000. Other majors, such as dance or drama, generally don’t offer as much consistent earning potential to graduates.

It’s a good idea to do some research on the future earning potential for the major and field you hope to pursue. This can be helpful in understanding how much you’d realistically stand to earn and, therefore, how long it may take to pay back student loans. Resources like the Payscale College Salary Report or the Bureau of Labor Statistics are two places to start.

How Much Should I Borrow for College?

A general rule of thumb is that students should limit what they borrow to what their potential career will reasonably allow them to repay. As a rough guideline, you may want to avoid borrowing anything more than you will likely be able to earn in your first year out of college.

Keep in mind that just because your financial aid package may include a certain amount in federal student loans, you are not required to borrow the maximum. Consider reviewing other sources of financial aid like private scholarships and grants. It can also be worth setting up an annual budget with anticipated costs for tuition, fees, room and board, and other expenses so you have an idea of how much you may actually want or need to borrow to pay for school.

College Graduates May Have More Financial Stability

In the long term, college graduates may have more financial stability. Research suggests that college graduates have both a higher median income than those without a college degree and earn more over their lifetimes.

Another factor, based on unemployment rates, is that people with a college degree tend to have greater career stability than those without a college degree.

This isn’t always true, however. As some recent studies suggest, certain career paths that don’t require a degree — such as construction inspectors or cardiovascular technicians — also offer significant earning potential.

Here’s What You Might Consider if You Choose to Take Out Student Loans

There are a number of factors to consider when deciding what type of student loan will best suit your particular needs, so it’s important to do your research beforehand.

Things like whether the loan is federal or private, what the current interest rates are, and how long it will take to pay off the loan could all contribute to how much student loan debt you ultimately find yourself in and are important considerations before taking out a loan.

Federal Loans vs Private Loans

There are two main types of student loans — federal loans and private loans. Federal loans are borrowed directly from the government, whereas private loans are borrowed from private lenders like banks, credit unions, and other financial institutions.

While the two loans serve the same purpose, there are some important distinctions. Because federal loans are made by the government directly, the terms and conditions are set by law. These loans also come with certain perks and protections, such as low fixed interest rates and income-driven repayment plans, that may not be offered with private loans.

Private loans are less standardized, since the terms and conditions are set by the lenders themselves. For example, some may offer higher interest rates than federal loans, and interest rates may be fixed or variable. It’s important to understand specific terms and conditions set by a private lender. Since private student loans may lack the borrower protections and benefits offered by federal loans, you generally want to tap financial aid and federal student loans first, then consider filling in any gaps with private student loans.

Understanding Interest Rates

Sometimes people fail to consider the interest rate on the student loan and how it will affect the amount of money they will end up owing.

Interest is calculated as a percentage of the unpaid principal amount (total sum of money borrowed plus any interest that has been capitalized).

Capitalization is when unpaid interest is added to the principal balance of a loan, and interest is calculated using this new, higher amount. You might have interest capitalization if, for example, you decide not to make interest payments on an unsubsidized federal loan or private student loan while you are in school. This unpaid interest will be added to your loan balance and interest will be charged on this new, higher balance.

For all federal student loans, interest rates are set by the government and are fixed, which means they won’t change over the life of the loan. With private student loans, it’s up to the lender to set the rate and terms. Generally students (or their parent cosigners) who have strong credit qualify for the best rates. If you are interested in borrowing private student loans, it’s a good idea to do some research and shop around so you can find the loan that best meets your needs.


💡 Quick Tip: Federal student loans carry an origination or processing fee (1.057% for Direct Subsidized and Unsubsidized loans first disbursed from Oct. 1, 2020, through Oct. 1, 2024). The fee is subtracted from your loan amount, which is why the amount disbursed is less than the amount you borrowed. That said, some private student loan lenders don’t charge an origination fee.

How Long Will it Take to Repay Your Loan?

Paying more money sooner can significantly reduce the amount of time it takes you to pay off a loan (as well as lower the cost). But that may not always be a feasible option. It’s important to consider the implications of different kinds of repayment plans when you take out a loan.

The standard term to repay a federal student loan is 10 years. However, depending on your income and other factors, you may need more or less time to pay back the money. The federal government offers a choice of payment plans, including fixed payment plans and plans that base your payment on your income. Private lenders also typically offer a choice of repayment options.

When choosing your loan term, keep in mind that a longer repayment term will lead to lower payments but a higher overall cost, since you’ll be paying interest for a longer period of time.

The Takeaway

Student loans can help open up doors to higher education for students, but borrowing responsibly is important. When deciding if student loans are worth it for you — and how much you should borrow — you’ll want to consider multiple factors, including your choice of major, future career path and earning potential, and the cost of the school you hope to attend after factoring in financial aid.

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.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

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.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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