The Student’s Guide to College Loans

Many students take out loans to help pay for college. This in-depth guide looks at the best student loans you can get and how to apply for them.

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by Staff Writers
Published on November 19, 2021
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The Student’s Guide to College Loans


Along with scholarships and grants, loans are one of the primary ways people fund their college education. Unlike the former, however, loans must be paid back, usually with interest.

Students typically take out loans after exhausting all other funding options. Before you apply for a college loan, be sure to consider multiple factors, such as the loan's interest rate and its potential long-term impact on your credit score and budget.

In this guide, we cover student loan fundamentals, including what types of loans there are, how to apply for a loan, and the processes of student loan repayment and deferment.

How Do Student Loans Work?

A college loan is similar to a car or home loan in that you compare your loan options before signing an agreement. You'll then receive funds you can put toward educational expenses such as tuition, housing, textbooks, and university fees.

In many cases, you aren't required to start repaying student loans until after you graduate. This allows you to focus on your coursework rather than worrying about making payments.

The best student loans for college boast low interest rates. This means you can pay back more of the principal, or the original amount of the loan, each time you make a payment.

Many student loans entail a simple application process. For federal loans, for example, you just submit the FAFSA. Some loan applications ask for a co-signer — usually a parent or guardian.

Federal vs. Private Student Loans: How Do They Differ?

Both private and federal loans for college can help you pay for your degree. That said, it's important to understand the differences between the two.

Federal student loans typically offer lower interest rates. What's more, some types of federal loans don't charge interest until after you graduate. However, the government caps the amount of money you can borrow each year.

As for private student loans, each lender has a unique loan cap. On average, this cap provides more funding for students than federal college loans. Nevertheless, because these lenders assume more risk by lending larger amounts of money to students, they typically charge higher interest rates than the federal government.

What Types of Student Loans Are There?

Depending on your financial situation, you may be looking at a mix of federal and private loans for college. Below, we introduce the five main types of student loans for college and who qualifies for each.

1. Federal Direct Loans

Federal Direct Loans are the U.S. government's primary method of helping college students finance their education. These loans come in two forms: subsidized and unsubsidized. The differences between the loan types can significantly impact your financial future.

Direct Subsidized Loans

Undergraduates with financial need qualify for Direct Subsidized Loans. As long as you remain enrolled as a full- or part-time student, the federal government pays your interest. In this way, the government subsidizes the cost of your education while you earn your degree.

After graduation, you'll have a six-month grace period until the loan begins incurring additional interest that you must pay along with the principal. Note that depending on your financial situation, you may qualify for deferment or forbearance.

Direct Unsubsidized Loans

Two groups of students qualify for Direct Unsubsidized Loans: undergraduates and graduate students with or without financial need. Unlike the case with Direct Subsidized Loans, the government does not make interest payments on your behalf.

During your time in school, you can — but are not required to — make these payments, potentially saving you thousands of dollars after you graduate. As with Subsidized Loans, your school determines the total amount of Unsubsidized Loans you can take out each year.


2. Direct PLUS Loans

Direct PLUS Loans, also called Parent PLUS Loans and Grad PLUS Loans, target the following individuals:

Applicants cannot have a low credit score, though the federal government occasionally makes exceptions if an applicant provides additional documentation.

The maximum PLUS Loan amount you can get is the cost of attendance (which varies depending on the school) minus any other financial aid you've received. PLUS Loans also have a fixed interest rate — a clear advantage compared to many private student loans.


3. Direct Consolidation Loans

No matter which type of federal student loan you select, you have to take out a new loan each year. So by the time you graduate college, you may have multiple loans that differ in both their amounts and their interest rates.

The federal government provides loan consolidation at no cost to students. After consolidating your loans, you make just one monthly payment. Filling out an online loan consolidation application takes most students less than an hour.


4. Private Student Loans

If you need additional funding after taking out federal loans, you might consider taking out one or more private loans for college.

Major banks offer private loans to undergraduate and graduate students. Parents who take out a loan directly or co-sign for a loan for a child may also turn to private college loans. Private lenders may ask for a co-signer to meet that institution's lending requirements.


5. Health Professions Loans

If your chosen degree prepares you for a career in health, you may qualify for a federal health professions loan. Students can take out as much money as they need for their degree. The four loan types are as follows, with each serving students in different health fields:

These health loans feature competitive, fixed interest rates that tend to be lower than rates offered by private lenders. However, alumni with these loans cannot discharge them through a federal loan forgiveness program.

How to Apply for Student Loans: 4-Step Guide

To apply for a student loan, follow the steps below. Note that it's best to prioritize federal loans. In general, you should only take out private student loans once you've exhausted all grants, scholarships, and federal loan options.

Step 1: Check Your Eligibility for Federal Aid

You must meet several qualifications before applying for a federal or private student loan. Some of the most important eligibility criteria are as follows:

  • Be a U.S. citizen or eligible noncitizen
  • Have a valid Social Security number
  • Have a high school diploma or equivalent, such as a GED certificate
  • Be enrolled in or accepted to a recognized degree or certificate program
  • Maintain satisfactory academic progress

Student loan qualifications apply not only to you but also to the school you select. The college or university you attend must be accredited by a recognized accreditation agency.

Step 2: Submit the FAFSA

The next step is to submit the FAFSA — on or as soon as possible after October 1 when it opens — to all schools you're applying to. If you're a dependent student (i.e., you don't meet the criteria of an independent student), you must report your and your parents' or guardians' information on the FAFSA.

If eligible, you may receive federal grants, federal work-study, and/or student loans by filling out the FAFSA. Normally, the amount you receive will depend on your financial need.

Step 3: Review Your Financial Aid Offers

After submitting the FAFSA, you'll receive a Student Aid Report, which tells you how much and what kind of federal aid you're eligible for. Additionally, you should start to receive financial aid award letters from schools you've been accepted to in the spring.

Take time to compare your financial aid offers before deciding which college to attend. Once you've done that, you can figure out whether you may need private loans to cover any remaining costs for college.

Step 4: Decide Whether You Want to Apply for Private Loans

If you've found you need more money than what your school and the FAFSA determined for your college expenses, you might want to consider taking out private student loans.

Start by researching various financial institutions' private student loan options and their interest rates. Remember that these loans will typically have higher interest rates than federal loans. You'll also need to have a good credit history and most likely a co-signer.

Your school's financial aid office may be able to offer some advice on the best private loans and vendors.

How Does Student Loan Repayment Work?

One of the main differences between private and federal student loans involves payment plans.

With federal loans, you don't need to make any payments as long as you stay enrolled at least part time. After graduation (and any grace periods), you'll be expected to make regular repayments.

Unlike federal student loans, most private loans require interest payments before you graduate. While private student loans can't be consolidated into a Direct Consolidation Loan, they may be refinanced. As such, you may have to make separate loan payments each month.

Check with your lender to learn more about your refinancing and loan consolidation options.

If you took out any private loans with variable interest rates, expect your interest rates to rise at some point.

What Is Student Loan Deferment and Forbearance?

Student loan deferment and forbearance both refer to temporary loan relief — a period during which a lender does not expect you to make any payments on your student loan.

In most cases, interest will accrue during your period of deferment or forbearance (except in the case of certain forbearances, such as that offered as a result of the COVID-19 pandemic). This means your balance will increase and you'll pay more over the life of your loan.

You may qualify for student loan forbearance or deferment if you lose your job or experience a temporary financial setback. To apply, you may need to fill out one or more applications, especially if you have multiple private loans.

Economic factors can also prompt lenders to offer student loan relief. For example, in response to the COVID-19 pandemic, the U.S. Department of Education made federal student loan payments optional.

What Is Student Loan Forgiveness?

One big advantage of federal student loans is their regulations regarding forgiveness, discharge, and cancellation. All three terms refer to no longer being required to make payments on your student loans.

You may qualify for student loan forgiveness or cancellation if you lose your job or find work in an approved field, such as education and the nonprofit sector. Discharge typically occurs if you become permanently disabled and cannot work.

Parents who take out a PLUS Loan may also qualify for student loan forgiveness if their child's school closes down or if their child becomes permanently disabled. Additionally, you can discharge some federal loans by declaring bankruptcy.

If you think you might qualify for student loan forgiveness, discharge, or cancellation, ask your loan provider how to apply. Depending on your loan, you may need to continue making payments while the government reviews your application.

Frequently Asked Questions About College Loans

How much money can you get from student loans? true

The amount of money you can get from college loans depends on several factors, including your lender and your financial eligibility. Depending on their year in college, undergraduates can borrow $5,500-$12,500 in Direct Subsidized and Unsubsidized Loans each year.

Private loans often allow you to borrow more money but have stricter lending standards, such as requiring a credit check and co-signer.

How are student loans paid out? true

Federal student loans are first put toward tuition and fees, followed by room and board (if you live on campus). Then, any remaining loan money is deposited directly into your bank account to be used for other educational and related living expenses, such as textbooks and transportation.

Most schools disburse grant and loan money twice per academic year, or once a semester.

What can you use your student loan money for? true

While student loans primarily serve to pay your tuition and fees, you can also use them to pay for expenses associated with college. Allowable expenses for student loans include transportation, personal expenses, room and board, professional licensure fees, and study abroad program costs.

The Department of Education imposes some restrictions on how student loans should be spent. As a rule, student loans should be used for educational expenses. College or career school costs can vary significantly; therefore, students should be sure to research all schools that may meet their academic and financial needs.

What is the average student loan payment per month? false

According to EducationData.org, the average student loan payment is $393 per month. That said, not all individuals with student loans are required to make payments due to deferment and other repayment options.

EducationData.org also notes that the average U.S. borrower spends around two decades paying off student loans. Interest rates can make repaying student loans difficult and time-consuming. Research has shown that interest accounts for up to two-thirds of the average student loan borrower's total cost of repayment.

How do private lenders determine how much money you get? false

Private lenders vary in the amount of aid they can offer college students, though most provide aid to cover the total cost of your education minus other aid you receive, such as scholarships and federal loans.

Some private lenders may provide up to $500,000 to cover the total school-certified cost of attendance. Your eligibility for private aid is typically determined more like a conventional loan, taking into account your credit score and other financial data.

DISCLAIMER: The information provided on this website does not, and is not intended to, constitute professional financial advice; instead, all information, content, and materials available on this site are for general informational purposes only. Readers of this website should contact a professional advisor before making decisions about financial issues.


Feature Image: designer491 / iStock / Getty Images Plus

Manage your student loans and save money with our complete guide to loan refinancing and consolidation. Didn't receive enough financial aid to attend your target college? Consider submitting an appeal letter to explain your situation and request more money. Your best guide to the options out there for private student loans and how they work.