Tuition typically ranks as a major concern when people are looking at colleges, and students of all backgrounds and income levels depend on loans to help finance their education. Like any other type of loan, student loans enable borrowers to receive money that must eventually be paid back with interest. Student loans broadly break down into two categories: federal loans -- provided by the U.S. government -- and private loans -- provided by banks, credit unions, and other lenders.
Student loans are used to cover tuition costs, but they can also cover other expenses associated with attending college, such as textbooks, room and board, and transportation. This page outlines the basics of student loans, including borrowing options, repayment plans, and the major differences between federal and private loans.
Top 10 Things Students Should Know Before Taking Out a College Loan
- How Much Can I Get From a Loan?
The amount of loans you can receive depends on several factors, including your lender and your financial eligibilty. In general, undergraduates can borrow $5,500-$12,500 in subsidized and unsubsidized federal loans each year, based on variables like their dependency status. Private loans often allow you to borrow larger amounts but feature stricter lending standards, such as a credit check or a cosigner for less qualified borrowers.
- Are There Colleges That Do Not Accept Loans as a Form of Payment?
Any reputable, accredited college should accept student loans as payment for tuition. A school that asks you to pay tuition upfront through some other method, such as a check or credit card, is most likely disreputable and should be avoided. Most colleges give you the option to pay tuition out of pocket, but this should never be required. If you have any doubts about a school, check its accreditation status to ensure its reputability.
Increasingly, many "no-loan" colleges offer financial aid for qualifying students in the form of grants and scholarships, enabling recipients to graduate without taking on any student loans. Primarily offered by elite private colleges, the no-loan format is highly competitive and typically only supports students who demonstrate significant financial need.
- What Can I Use the Money From My Loan On?
While student loans primarily function to pay your tuition, you can also use them to pay for expenses associated with college. The Federal Student Loan Handbook lists several allowable expenses for student loans, including transportation, personal expenses, room and board, professional licensure fees, and study abroad costs. The Department of Education does impose some restrictions on how student loans should be spent. For example, costs associated with maintaining your car are covered, while buying a new car is not.
- What Are the Main Differences Between Federal and Private Loans?
Federal and private loans both pay for your tuition, but federal loans are almost always preferable, as they offer lower interest rates and more lenient repayment options. Many students qualify for federal loans, while private loans may require an established credit record. Federal loans can often be consolidated to lower your payments after you graduate, and federal loans may offer income-based repayment and other deferment options if you are struggling to make payments. Private loans sometimes offer other payment options, but they are generally less forgiving.
- How Do Private Lenders Determine How Much You Get?
Private lenders vary in the amount of total aid they offer, though most provide aid to cover the total cost of your education minus other aid you receive (such as scholarships or 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.
- How Does the Federal Financial Aid Office Determine How Much You Get?
Federal student aid follows more uniform lending standards, allowing undergraduates to borrow up to $12,500 per year and graduate/professional students to borrow up to $20,500 each year. As an undergraduate, the amount of aid you receive largely depends on your status as a dependent or independent student. Dependent students are younger (typically under age 22) and have their parents' finances assessed to determine their loan eligibility. Independent students are typically older and have only their own income assessed.
- Are There Any Benefits to Obtaining a Private Loan Over a Federal Loan?
For most students, private loans offer no benefits over federal loans -- outside of the potential to borrow more money. When selecting loans, you should always attempt to obtain the largest amount of federal funding possible before pursuing private loans to cover any remaining expenses. Although less common, some private loans may offer leniency when it comes to repayment plans, forbearance options, and favorable interest rates, so be sure to research different lenders if you are considering taking out private loans.
- Can You Get Enough From Federal Loans to Pay for Every Term of a Four-year Degree?
Depending on your college's tuition rate, you may be able to pay for your education entirely with federal loans. If you qualify as an independent undergraduate student, you may be eligible for up to $57,500 total for your bachelor's degree, which may be enough to cover the total tuition expenses at some schools. However, dependent students are only eligible for up to $31,000 for their undergraduate education, which may not be enough to cover the total tuition at many schools.
- How Do I Get Into a Debt Relief Program?
If you have federal loans through several different loan servicers, you may be able to reduce your monthly payments by combining your loans into a Direct Consolidation Loan. Folding multiple loans into a single monthly payment, consolidation may also reduce your total payment amount, though the total time you spend repaying your loans (and thus accruing interest) may increase.
You may also be able to stop paying loans temporarily (known as deferment or forbearance) due to certain circumstances, such as illness, unemployment, economic hardship, military service, or returning to school.
- Can You Get a Four-year Degree for Free in the U.S.?
While not common, it is possible to earn a four-year degree for free -- albeit with some specific qualifications. Some students may be able to fund their education entirely through grants and scholarships, which never need to be repaid. Tuition-free colleges do exist, though they typically hold rigorous admission standards or require students to work as part of their education. Many states and colleges have also enacted measures that fund college for state residents, covering tuition for students who meet certain academic or financial need standards.
Is Applying For a Loan Easy?
While private and federal loans serve the same purpose, the steps to obtain these types of aid differ significantly. To qualify for federal loans, you only need to fill out the FAFSA, which assesses your eligibility for student aid based on factors such as income and household size. Based on your provided information, your college will help you understand your financial aid offer, including how much federal aid you qualify for.
Private loans require you to work directly with a lender to apply for a loan. As with other types of loans -- such as home or auto loans -- lenders favor borrowers who appear likely to repay their loans on time. To qualify for a private college loan, you will typically need a strong credit score and a low debt-to-income ratio. If you are young or have a lower credit score, you may need a cosigner with a strong financial history to qualify for private loans.