How Do Student Loans Work? Here's What You Need to Know

You've made it past college admissions, and now it's time to figure out how to afford that tuition bill. With student loan debt at record highs, college students across the country are turning to student loans to help finance the enormous cost of higher education. And because this cost might be one of the largest you incur in your lifetime, we have answered some of the most common questions to help you understand how student loans work.

What Is a Student Loan?

A student loan is money you borrow for post-secondary education and repay over time, usually with fees and interest. The amount you pay back will almost always be greater than the amount you borrow, as interest accrues over the life of your loan. Your rate will determine how much you will pay on top of your requested loan amount. The majority of college students take out student loans to cover their education costs, as many families are unable to cover the full cost of college. In addition to student loans, you should explore grants and scholarships to afford your university costs.

If you've determined you need student loans to cover your tuition and costs such as room and board, first you should know there are two main types of student loans: federal and private loans. Below, we'll explain the features of student loans and the pros and cons of both types of loans for college.

Federal Student Loans

Before you consider private loans, first max out all your federal student loan options by filling out the Free Application for Federal Student Aid (FAFSA). By filling out the FAFSA, you'll find out if you qualify for grants, scholarships, federal work study programs and federal student loans. Federal loans are funded by the government and offer fixed interest rates with multiple repayment options, including income-driven repayment plans that calculate your payments as a percentage of your income. In comparison, most private lenders tend to charge higher interest rates than federal student loans and come with fewer repayment options. Private loans are also based on the borrower's or co-signer's creditworthiness.

Private Student Loans

After you have exhausted your federal options and you still need money for college, start looking into the best private student loan lenders. Like the government, these lenders offer loans for students who need money to cover their college costs. However, unlike federal loans, the interest rate that you qualify for will depend on your or your co-signer's credit history. With federal loans, your financial information is used to determine the loan you qualify for but not your interest rate for that loan type as rates are fixed.

How Do I Apply for Student Loans?

Now that you understand the difference between federal and private loans, let's discuss how you're going to start applying for your financial aid, how FAFSA works and how to take out a student loan. First, visit the FAFSA website to create a Federal Student Aid (FSA) ID and account.

FAFSA Login Page

The FAFSA process will take about 60 minutes. Before you start the student loan process, have the following ready.

FAFSA Checklist

Here's what you'll need to fill out your application:

  • Your Social Security number or Alien Registration Number
  • Your (or your parents') federal income tax returns and W2 forms
  • Your (or your parents') bank statements
  • Your FSA ID

Once you've completed the FAFSA, the schools that you are applying to will review your information and send you a financial aid packet that describes the loans, grants and scholarships for which you qualify. Unfortunately, the government limits how much it will help fund your education. If your financial aid package still leaves you short of funds, you can explore private lender options or additional scholarship opportunities to cover the gap.

How Do Student Loans Work When I'm in School?

Most students who need government school loans or private loans to attend school aren't typically paying them back while in school. Fortunately, lenders don't expect you to make payments while you're studying for your degree—but you are given the option. Many private lenders offer in-school repayment and interest-only repayment, where you pay off the interest accrued on the loan while in school.

The interest on your student loans will accrue each year unless you have Perkins loans or federal subsidized loans. So, while there's no one forcing you to make loan payments in school, there's nothing prohibiting you from doing so, either. The table below gives you a quick summary of how this works across different types of student loans.

Loan typeDoes interest accrue while in school?Are loan payments due while in school?
Federal subsidized loansNoNo
Perkins loansNoNo
Federal unsubsidized loansYesNo
Federal PLUS LoansYesNo
Private student loansDepends on the loanDepends on the loan

What Happens to My Student Loans After I Graduate or Leave School?

For federal loans, not including PLUS Loans, the government allows students a waiting period called a "grace period" of six months after graduating. During that time, you won't need to make payments toward your student loan balance, but interest will still accrue. However, you can extend this period or defer your student loans if your situation is one of the following:

  • You are an active military member
  • You return to school before the grace period ends
  • You consolidate your loans

In the event of military duty or returning to school, your grace period essentially resets and will restart once you leave the military or stop attending school. In the event that you consolidate your loans, the grace period is effectively waived and you will begin repayment in two months, after your consolidated loan is paid out.

When Do I Start Repayment?

After your grace period ends, you will have to start paying back your student loans. You'll need to choose a repayment plan with your federal or private student loan servicer. Student loan servicers manage your loan payments and process your requests for deferment and forbearance. Some of the largest servicers for student loans are Navient, Great Lakes, Nelnet and FedLoan.

Your private loan repayment options will depend on your lender and servicer. With federal school loans, if you don't choose a repayment plan, you will automatically be enrolled into standard repayment, where you will pay off the loan over 10 years. However, if you're looking to pay the lowest possible amount each month, then it might make sense to discuss your options with your servicer. The standard repayment plan won't always be the best plan for your financial situation. If your income is on the lower side, then opting for the income-driven repayment plan may be a better option.

Here's a full list of your repayment options for federal student loans.

Repayment planLoan typeYears to repayMonthly payment
Standard RepaymentAll federal loans10 years (10 to 30 for Consolidation Loans)Fixed amount
Graduated RepaymentAll federal loans10 years (10 to 30 for Consolidation Loans)Increases every two years
Extended RepaymentAll federal loans*25 yearsFixed or graduated amount
Revised Pay As You Earn (REPAYE)Direct Loans (not including PLUS Loans made to parents)20 or 25 years10% of discretionary income**. Any balance after 20 or 25 years will be forgiven.
Pay As You Earn (PAYE)Direct Loans (not including PLUS Loans made to parents)20 years10% of discretionary income**. Any balance after 20 years will be forgiven.
Income-Based Repayment (IBR)Direct and FFEL Loans (not including PLUS loans made to parents)20 or 25 years10% or 15% of discretionary income**. Any balance after 20 or 25 years will be forgiven.
Income-Contingent Repayment (ICR)All direct loans25 yearsThe lesser of 20% of income or what you'd pay on a 12-year fixed payment plan**. Any balance after 25 years will be forgiven.
Income-Sensitive RepaymentAll FFEL loans15 yearsBased on annual income, will vary based on lender.
  • *Direct Loan and FFEL Loan borrowers must have more than $30,000 in outstanding loans for these specific programs.
  • **Monthly payments will be updated based on changes in your income and family size.

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