Once you've decided to go to college, understanding how student loans work is the next big step.
Student loans help students pay for college, filling financial gaps and providing essential funds to cover educational expenses. It's important to fully understand the application process, disbursement, and repayment requirements associated with student loans, to ensure that you make responsible, effective decisions about funding your education.
Degree-seekers at public colleges and universities can apply for federal financial aid and student loans through the free application for federal student aid — more commonly called the FAFSA. Students can apply for private loans as well, but the terms and conditions for those vary significantly.
Not all student loans are alike, and it can be confusing to figure out which types of loans best meet your needs. This guide provides information on available forms of student aid, how you can benefit from them, and other options for financial assistance.
What Is a Student Loan?
A student loan is a lump sum of money that a student receives from the federal government, their state government, or a private company, which they can use toward tuition or other school expenses. However, they must pay that money back after graduation, plus interest.
In addition to scholarships, grants, and work-study programs, many learners use student loans to fund their education. Student loans can be a helpful tool if you use them responsibly. Student Loan Hero reports that 69% of students in the class of 2019 took out loans to cover college expenses.
Student Loan Hero's data also indicates that students in 2019 graduated with an average debt of $29,000. It's best to try to borrow as little as possible to minimize the long-term costs; before committing to a large loan, research starting salaries in your field to determine your ability to pay them back after graduation.
Pros of Student Loans
- Student loans offer financial support for students who would otherwise be unable to attend college.
- You do not need a credit history to receive a student loan.
- Student loans often have lower interest rates than private loans.
- Fixed interest rates prevent the terms of a loan from changing over time.
- Many student loans do not require repayment until after graduation, and they have additional options for deferment or loan forgiveness, when applicable.
- Student loans often provide flexible repayment plans that adjust to accommodate the borrower's income and cost-of-living expenses.
Cons of Student Loans
- There are limits to the amount of federal aid an individual can receive.
- If you leave an academic program without finishing, you have to pay back the loan immediately.
- Private student loans may require a cosigner.
- Student loans can be expensive, depending on how much money you borrow and what your interest rate is.
- Defaulting on student loans can result in a decreased credit score.
- Interest rates on private student loans may fluctuate.
- Depending on financial need, students may not qualify for some loans.
What's New in 2021-2022?
As always, current and future students should complete FAFSA forms as accurately as possible and update any information regarding their financial situations, especially in light of the COVID-19 pandemic.
In early 2020, the Office of Federal Student Aid suspended student loan payments, paused collections on defaulted student loans, and eliminated interest rates. These actions were repeated throughout the year, and in January 2021, loan payments were pushed back to September 30, 2021. These measures only apply to federal student loans, however — not private student loans.
In 2020, President-Elect Biden proposed a student loan program that would allow for forgiveness of up to $10,000 of student loan debts. While monthly loan payments have remained suspended during the COVID-19 pandemic under his presidency, the forgiveness plan remains in limbo.
Meanwhile, individuals who can repay their loans are encouraged to keep doing so. When repayments begin again, automatic payments will resume through traditional or income-driven repayment plans.
Types of Student Loans
There are two primary student loan types: private and federal. Both types can help reduce financial anxieties and build your credit score, but differ in a few distinct ways.
Federal Student Loans
Student loans from the federal government offer many advantages, such as fixed interest rates. Federal student loans also offer more flexible repayment plans and access to loan forgiveness programs under certain conditions.
Typically, the amount you can borrow each year depends on your education level and status as a dependent or independent student. Yearly loan limits can vary from $5,500-$12,500 for undergraduates. Loan limits for graduate students can reach up to $20,000.
Direct Subsidized Loans
Direct subsidized loans provide financial aid to undergraduate students who demonstrate outstanding financial need. The loan amount may not exceed the student's need, but the borrower does not need to pay any of the accrued interest during their schooling or for the first six months after graduation.
Direct Unsubsidized Loans
All undergraduate and graduate students can receive direct unsubsidized loans, regardless of financial need. Your school determines the amount of the loan you receive based on other financial aid you have accessed. Unlike subsidized loans, unsubsidized loans require students to pay interest as soon as they begin repaying the loan.
Direct PLUS Loans
Direct PLUS loans offer access to federal financial aid for graduate and professional degree students, as well as the parents of dependent undergraduate enrollees. These loans require the borrower to pay interest during all periods. People who take out a direct PLUS loan also need to pay an origination fee, which is deducted from the loan disbursement.
Direct Consolidation Loans
Direct consolidation loans allow you to combine multiple federal loans into a single federal loan. These loans offer lower monthly payments and more diversity in repayment plans, which help decrease the likelihood of default. They also enable you to apply for certain loan forgiveness programs. To find out more about how to consolidate student loans, contact your school's loan administrator.
Private Student Loans
Private loans usually come from banks or other private companies and often end up costing more than federal loans due to interest rates. They can also require students to start making repayments while still in school. Most students only apply for private loans after maxing out their federal financial aid.
Before committing to one, consider the costs associated with private student loans. You will need to pay a lender fee to the vendor, who may not allow you much freedom in choosing a loan repayment plan, and the terms for repayment vary by vendor.
Additionally, private loans are often unsubsidized and may come with an annual cap, limiting the amount of aid available. Interest rates for private loans are also variable. Your credit history, along with your cosigner's, can affect all of these factors — especially the interest rate.Are Private Student Loans Too Risky?
How Are Student Loans Paid Back?
Degree-seekers have many options when it comes to federal and private student loan repayment programs. Common repayment formats include:
- Income-Based Repayment: The borrower pays 15% of their income monthly for up to 25 years.
- Standard Repayment Plans: The recipient pays a fixed amount monthly for up to 10 years. Payment rates vary based on the loan amount and interest rate.
- Graduated Repayment Plans: Over 10 years, a student makes monthly payments that start out low and gradually increase every two years.
- Extended Repayment Plans: The borrower makes very low monthly payments over the course of 25 years.
- Revised Pay-as-You-Earn Repayment Plans: You pay 10% of your income each month over 20-25 years.
- Income-Contingent Repayment Plans: Students make very low monthly payments adjusted to low-income work for over 25 years.
Federal student loans typically allow for a six-month grace period after graduation before requiring repayments. Once the grace period ends, you must begin making payments monthly and on time. Interest is added to your payment each month, usually at a fixed rate.
When taking out multiple federal loans, you may want to consider a direct loan consolidation program. These programs combine federal loans from different lenders into a single loan that you can repay using a standard, extended, or income-based plan.
It typically takes 10 years to repay a federal student loan, while private student loans usually take 5-15 years.
There are some situations where borrowers can access student loan forgiveness, including:
- Public Service and Teacher Loan Forgiveness: This option forgives remaining loans for public service workers and teachers who work in high-need areas for a minimum period of time.
- Closed School Discharge: Students whose schools close before they can earn a degree often receive loan forgiveness.
- Total and Permanent Disability Discharge: This option forgives all loans for students who have permanent disabilities.
- Death or Bankruptcy: These two cases result in forgiveness of most loans, though in the case of bankruptcy, you must apply for student loan forgiveness separately.
The Department of Education's Federal Student Aid website covers additional types of loans.
What Happens if I Miss a Payment?
If you miss payments, your loan can go into default. Federal loans allow nine months of missed payments before you default on a loan, but some private loans only allow one missed payment.
Loan default can damage your credit score, and it allows the federal government to use your tax refunds to offset your debt.
Given these risks, you should carefully choose your repayment plan to ensure that you can meet your monthly payments. You can potentially escape loan default by applying for loan rehabilitation or loan consolidation, both of which allow you to negotiate with your lender for lower monthly payments.
If you do miss a payment, there are a few ways you can mitigate the damage. First, applying for loan forbearance or deferment suspends payments for a short period. Unfortunately, interest may still accrue during this period, increasing the amount you owe and halting progress toward loan repayment or forgiveness. Deferment and forbearance also give you time to change your repayment plan to an income-driven pathway that aligns better with your earnings.
How to Get a Student Loan
The process for taking out a student loan can vary, depending on the type of loan and how much financial support you need. The following set of steps describes the most common process for pursuing financial aid, whether for a traditional or online program:
Complete Your Free Application for Federal Student Aid
Start by completing the FAFSA to determine your eligibility for federal financial aid. Repeat this step every year for as long as you wish to receive federal aid.
Apply for Grants and Private Scholarships
Grants from the federal government and scholarships from private organizations can each take a chunk out of your education expenses.
Communicate With Your School
Your school's financial aid office will work with you to apply any federal aid you receive to your account.
Complete Prep Work for Your Federal Loans
If you receive federal student loan money, you may need to complete entrance counseling to understand your responsibilities as a borrower. You will then need to sign a master promissory note for each loan.
Apply for Private Student Loans
Once you've maxed out all other forms of aid, consider a private student loan from a reputable lender to make up the difference. Always check terms and conditions thoroughly before committing to a loan.
Frequently Asked Questions
How Long Can You Get Federal Financial Aid?
There is no time limit on federal direct unsubsidized loans or PLUS loans. For all other federal loans, you can only receive aid for 150% of the published length of the program you intend to complete. For example, you can only receive federal aid for a four-year bachelor's degree for six years.
How Do You Qualify for Federal Loans?
To qualify for federal loans, you must first present proof of citizen or eligible noncitizen status, along with a valid social security card, selective service registration, and a high school diploma or equivalent with a 2.0 minimum GPA. Next, fill out a FAFSA form and enroll in an eligible school on a part- or full-time basis.
Is There an Income Limit for Federal Student Loans?
There is no income cutoff for federal student aid. However, your income will influence the amount of student aid you can receive. Completing your FAFSA calculates your estimated need based on the cost of attendance at your school minus your expected family contribution.
How Do You Get Approved for a Private Student Loan?
Private student loans set their own loan approval requirements, which typically include age, education, and citizenship requirements; enrollment in an eligible school; and an adequate credit score and income. Private lenders may also require a cosigner on your loan. The lender typically sends funds directly to your school.
Melissa Sartore holds a Ph.D. in history from the University of Wisconsin-Madison. Her BA and MA in history are from Western Illinois University. A medievalist by training, she has published on outlawry in medieval England with additional publications on outlaws in popular culture and across geographic and historical boundaries.
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