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Since most students don’t have enough cash on hand to pay for college out of pocket, many turn to student loans to help cover their education costs.
If you’re thinking about getting a student loan, it’s a good idea to learn how student loans work first. This way, you’ll be prepared before taking on student loan debt. Here’s how student loans work:
What are student loans?
Student loans are loans made specifically to help cover the costs of tuition, room and board, and other expenses that come with going to college.
Keep in mind that you must be enrolled in an accredited education program to qualify for student loans.
There are two main types of student loans:
- Federal student loans are backed by the U.S. government. These loans have fixed interest rates and come with federal benefits and protections. This includes access to deferment and forbearance options, income-driven repayment plans, and student loan forgiveness programs.
- Private student loans are issued by private lenders. Unlike federal student loans, private student loans require a credit check and verifiable income. You’ll also need to meet any other requirements set by the lender.
Learn More: Federal vs. Private Student Loans
Types of student loans
Many college students end up with a mix of both federal and private student loans to help them pay for school.
It’s typically a good idea to start with federal student loans since they come with more borrower benefits and protections. Then, you can consider using private student loans to help fill any financial gaps.
Here’s how both types of student loans work:
Federal student loans
Federal student loans are backed by the U.S. government and have interest rates set by Congress. They also come with several repayment options.
To apply for federal student loans, you’ll need to complete the Free Application for Federal Student Aid (FAFSA).
There are three main types of federal student loans:
- Direct Subsidized Loans: These loans are available to undergraduate students with financial need. The government pays for all interest on subsidized loans while you’re in school at least half time.
- Direct Unsubsidized Loans: These loans are available to both undergraduate and graduate students, regardless of financial need. Unlike subsidized loans, you’re responsible for all interest charges on unsubsidized loans.
- Direct PLUS Loans: There are two kinds of PLUS Loans: Grad PLUS Loans and Parent PLUS Loans. Grad PLUS Loans are for graduate students, while Parent PLUS Loans are taken out by parents paying for their child’s education. PLUS Loans also require a credit check.
Keep in mind that federal student loans offer several repayment plans, including income-driven repayment (IDR) plans and student loan forgiveness.
If you sign up for an IDR plan, your monthly payment will be based on your income. After 20 to 25 years of payments (depending on which IDR plan you choose), any remaining balance will be forgiven.
There are also other student loan forgiveness programs available for federal student loans.
Learn More: How to Take Out a Student Loan
Private student loans
Private student loans are offered by private lenders. If you apply for a private student loan, your interest rate will depend on the lender as well as your credit score and income.
You also have the option to apply with a student loan cosigner, which could make it easier to get approved.
Unlike federal student loans, private student loans don’t have built-in deferment and forbearance programs if you run into financial hardship. Instead, assistance is at the discretion of the lender. Private student loans also don’t offer any forgiveness programs — so be sure to borrow only what you need so you can keep your future costs as low as possible.
Learn More: Average Cost of College in the U.S.
How much can you borrow?
There are student loan limits that could impact how much money you’re able to borrow, depending on the type of student loan you have:
- Federal student loans: The borrowing limits for both subsidized and unsubsidized federal student loans depend on your year in school and your dependency status. Generally, independent graduate and graduate students can borrow more than dependent undergraduate students. With PLUS Loans, you can borrow up to the cost of attendance minus any other financial aid received.
- Private student loans: With private student loans, you might be able to borrow up to the cost of attendance, but the exact limits will depend on the individual lender.
|Loan type||Loan limits|
|Direct Subsidized Loans||$3,500 to $5,500 per year|
|Direct Unsubsidized Loans||Dependent undergrad: $5,500 to $7,500 per year ($31,000 total limit)
Independent undergrad: $9,500 to $12,500 per school year ($57,500 total limit)
Graduate and professional: $20,500 per year
|Direct PLUS Loans||Up to the cost of attendance minus any other financial aid received|
|Private student loans||Up to the cost of attendance
(depending on the lender)
How to apply for student loans
The application process is a little different for federal and private student loans. Here’s how to apply for both types:
Federal student loans
- Submit the FAFSA: The FAFSA is used to determine which federal student loans you’re eligible for. To complete it, you’ll need your financial information from your tax returns. You might also need your parent’s info if you’re a dependent student.
- Review your financial aid award letter: Your school’s financial aid office will send a letter detailing your financial aid package. This will include any federal student loans, grants, and work-study programs you qualify for.
- Accept your loans: After you review your award options, you can accept the federal student loans you want. These loans are typically disbursed at the start of the term. Any funds left over after your school costs are paid for should be refunded to you within a couple of weeks.
Learn More: When You Should Apply for a Student Loan
Private student loans
- Shop around and compare rates: Before taking out a private student loan, be sure to consider as many lenders as possible to find the right loan for you. You can easily compare your rates from multiple lenders with Credible.
- Complete the loan application: Once you’ve reviewed your options, you can complete a full application with the lender. You’ll likely undergo a hard credit check at this point.
- Accept your student loan: If your application is accepted, you’ll get a final student loan offer. Once you accept the loan, you’ll need to sign your loan documents. Most private student loans will need to be certified by your school before the funds are sent to your school’s financial aid office. Any leftover money will then be given to you. Keep in mind that this process generally takes about three weeks but could take up to two months if there are delays — so be sure to give yourself plenty of time to get a student loan.
If you decide to take out a private student loan, it’s important to spend time considering as many lenders as possible. Credible makes this easy — you can compare your prequalified rates from multiple lenders in two minutes.
How does student loan interest work?
Depending on the type of student loan you get, you’ll have either a fixed or variable interest rate. Your interest rate will impact both your monthly payment along with the total cost of your loan.
- Federal student loans: Federal student loans come with fixed interest rates. A fixed rate will stay the same during the life of the loan, which also means your payment won’t change (unless you change payment plans). However, your payments and interest charges could vary depending on if your loan is subsidized or unsubsidized, as well as if you’re on an IDR plan.
- Private student loans: With a private student loan, you could have a fixed or variable rate. While fixed rates stay the same, variable rates can change with the market. This means your payment could go up or down in the future with a variable-rate loan.
If you decide that a private student loan is right for you, be sure to consider whether a fixed or variable rate would be better for your situation. With Credible, you can easily compare your prequalified rates — both fixed and variable — from multiple private student loan lenders in two minutes.
Credible is a multi-lender marketplace that helps consumers find financial products best suited to their unique circumstances. With Credible, you can easily compare accurate, personalized loan options — without affecting your credit score or risking your personal information.