6 Questions to Ask Before Taking College Loans in 2024-25

Factors for students and their families to consider include who is taking the loan—parent, student, or both—the type of loan, amount and interest rate, which could be considerably higher than in recent years. Repayment plans are another consideration, including a new repayment option for federal student loans announced earlier this year by President Biden.

Also, remember that the Free Application for Federal Student Aid, commonly known as Fafsa, for the 2024-25 academic year won’t be available until December, two months later than usual.

As always, families need to take their overall debt picture into account. A recent survey by New York Life found that 78% of adults with student loans say their student debt is getting in the way of their long-term goals, and 75% say they would have done something differently to avoid taking out student loans.

Here’s what people considering loans need to ask themselves for the next school year:

How much can I afford to borrow?

Parents and students should first estimate the cost of each college they are looking at and the amounts that would have to be borrowed given the family’s financial situation. Net price calculators—generally available on a college’s website—can give prospective students a sense of what they might pay, after taking grants and scholarship aid into account.

Federal Student Aid, which is part of the Education Department, offers a loan-simulator tool to help students explore the impact of borrowing. Other online calculators can also be used to determine likely monthly loan payments based on factors such as loan amount, interest rate and repayment time frame. Credible, an online marketplace for loans, also offers an online calculator to help families make informed borrowing decisions.

It is generally advisable to keep monthly payments to less than 10% of the borrower’s income, says student-loan specialist Mark Kantrowitz. Students can make an educated guess about their earnings potential by using an online tool such as Salary.com or Glassdoor. While it’s hard to predict the job market several years out, the National Association of Colleges and Employers offers a resource with salary projections for 2022 college graduates.

Who is taking out the loan?

Some parents want their children to have skin in the game, and there can be advantages to students taking loans themselves, including the opportunity to build credit. Depending on the type of loan, students may need a cosigner, which has its own risks. But even if loans are in a student’s name, parents who are financially able could decide to pay them off.

Parents who wish to borrow to fund their children’s education need to carefully consider what the impact could be on their retirement. “The best approach never puts retirement on the back-burner," says Doug Ornstein, senior manager of integrated solutions in the Charlotte, N.C., office of New York-based TIAA Wealth Management. People who risk their retirement security to pay for school may have to lean on their children financially later in life, which isn’t advisable, he says.

Why would I want a federal loan?

Federal student loans can have several advantages, including lower interest rates than some other options, particularly when the borrower doesn’t have stellar credit. The interest rate for undergraduate borrowers is 5.50% for loans disbursed between July 1, 2023 and June 30, 2024. There are several repayment options as well, and the potential for loan forgiveness.

The federal government offers direct subsidized loans—for students with financial need—and direct unsubsidized loans, which are broadly available. With a subsidized loan, the government pays the interest while students are in school at least half-time, during a six-month grace period after they leave school and during deferment periods.

How much students can borrow depends on their year in school and whether they meet the definition of a dependent or independent student. A dependent first-year student, for instance, could be eligible for up to $5,500 in direct loans for the first year of school, up to $6,500 the second year and up to $7,500 a year for the remaining time as an undergraduate. The federal government allows only a portion of the yearly loan amount to be subsidized, since it is footing the interest bill during applicable periods. There is a loan fee of 1.057% on all direct subsidized and unsubsidized loans disbursed on or after Oct. 1, 2020.

When larger loans are being sought, another federal product, a Parent Plus loan, is generally available to parents who don’t have an adverse credit history. These types of loans can cover the cost of attendance minus any other financial assistance your child receives. Plus loans first disbursed between July 1, 2023, and June 30, 2024, carry an interest rate of 8.05%. There is also a loan fee of 4.228% for all Plus loans disbursed on or after Oct. 1, 2020.

Why would I want a private loan?

Private loans—from a bank, credit union or other nonfederal entity—generally don’t carry many of the same protections that federal loans do, like loan forgiveness options. But people with good credit may be able to obtain private loans for lower rates than federal loans offer. Borrowers can compare options using online marketplaces such as Credible, LendKey and Sparrow. Students can use this resource from the Education Finance Council, a grouping of nonprofit and state-based organizations, to find state-based private loan options that may be more affordable than some other private loans. There may be different loan options for students or parents, depending on the loan provider. Families should carefully consider factors such as interest rate, repayment terms and other conditions before taking out these loans.

What about home equity and Heloc loans?

Interest rates on home-equity loans and home equity lines of credit, or Helocs, are high right now, running in the range of 8% to nearly 10%. Such loans also carry more risk than other types, certainly more risk than federal student loans, Kantrowitz says. “If you default on a home-equity loan or line of credit, the lender can foreclose on your home. If you default on a student loan, the lender can’t repossess your education," he says.

The proceeds of a home-equity loan or Heloc could be counted as an asset on the Fafsa, so the timing may matter, Kantrowitz says. “If you don’t draw down a Heloc, it doesn’t count against you," he says.

What are the repayment options?

When repayment begins depends on the loan. With federal direct loans, for instance, there’s a six-month grace period after a student graduates, drops below half-time enrollment or leaves school.

The standard repayment plan for federal loans is 10 years. But there are also plans that allow borrowers to repay based on their income and family size; the amount could change yearly based on a required recertification process. There is also a new plan dubbed SAVE that is considered the most generous of federal plans. Under the SAVE Plan, a single borrower who makes $32,800 a year or less won’t have to make any payments, and borrowers earning above that amount would save more than $1,000 a year on their payments compared with other federal income-driven repayment plans. The SAVE Plan also ensures that borrowers never see their balance grow due to unpaid interest as long as they keep up with their monthly payments.

For federal loans, families can use the federal government’s loan-simulator tool to find the best repayment strategy or see how their choice of school could impact how much they need to borrow.

Also keep in mind that federal forgiveness options may exist for students going into certain careers. The federal government offers forgiveness to eligible borrowers who are employed by a U.S. federal, state, local or tribal government or qualifying nonprofit organization. There’s also a teachers loan forgiveness program.

For private loans, common repayment plans include immediate repayment, interest-only repayment, partial-interest repayment and full deferment, though options can vary by lender, according to Credible.

Cheryl Winokur Munk is a writer in West Orange, N.J. She can be reached at reports@wsj.com.