Student Loans

How Do Student Loans Work? Here’s Everything You Need to Know.

how do student loans work

As college tuition costs continue to rise, student loans remain vital for many students hoping to afford a college education. Even with the numbers scholarships and grants that are available at many schools, a large number of students find that they still need to seek out a loan in order to fully fund their tuition, books, and costs of living.

So, how do student loans work exactly?

Here’s a basic overview of the student loan process:

  • The first step is filling out the Free Application for Federal Student Aid (FAFSA), which qualifies the student for federal student loans.
  • After submitting a FAFSA, students will receive a financial aid report, including a breakdown of federal loans and grants the student is eligible for. The student must sign a Master Promissory Note (MPN) to accept any of this aid.
  • Students also can apply for private loans by submitting an application to a lender, such as a bank or credit union, who will conduct a credit check and likely will require a co-signer for a lower interest rate.
  • Students receive the loan proceeds according to a disbursement plan arranged with the lender. Typically, the funds will be sent to the school directly.
  • In most cases, students will begin repayment of the loan after graduation.

How are student loans funded?

Federal student loans are backed by the federal government. The U.S. Department of Education provides more than $150 billion of federal aid each year through student loans, grants, and work-study programs. Many of these loans can be used to pay for career school or any level of a college education.

Funds for private loans are provided by private lenders, such as banks and credit unions.

How do you get a student loan?

The easy answer it to apply for one through a FAFSA or with a private lender. Students as young as middle school can use the federal government’s FAFSA4caster, a tool that can provide an early estimate of how much federal financial aid a student may qualify for. Private lenders will require a more traditional loan application, and receiving a private loan will depend on the application’s credit score and the qualifications of the co-signer.

How do federal student loans work?

Almost all students will qualify for some level of federal assistance to help pay for college or career school. Federal aid is not determined by age, race, or field of study. The level of income is considered, but it does not automatically disqualify an applicant.

Applicants must meet several basic requirements, including being a U.S. citizen, earning a high school diploma or General Educational Development certificate, and being accepted or enrolled as a regular student in an eligible degree or certificate program at least part-time.

If they meet these qualifications, applicants can then fill out and submit a FAFSA online. The data on this form also could be used by states and colleges to determine whether an applicant qualifies for their financial aid.

How do private student loans work?

Unlike federal loans, private loans do not have a minimum credit hours requirement. Applicants must apply for a private student loan through a private lender, such as a bank, and typically must provide a social security number, a driver’s license, and information about income, intended college, and living expenses. Co-signers are usually necessary, and they must provide the same documentation and need to have a good credit history.

Not all applicants will be approved for private loans. When private student loans are used, they tend to be for the difference between the student’s expected costs for college and what the student is receiving in other federal loans, grants, and scholarships.

Be aware that private loans typically have higher interest rates than federal student loans, which have fixed interest rates. Private student loan interest rates can be fixed or variable, and variable rates can change at any time over the life of the loan and can be as high as 18 percent.

How do you get your student loan money?

If you are receiving federal aid, the financial aid office at the student’s school will explain how the money will be paid out. First-time recipients must sign a promissory note and receive entrance counseling to make sure they understand the financial responsibilities they are taking on with the loan.

Federal loans typically cover one academic year, and when the loan is disbursed the school first deducts the cost of tuition, room, and board. The student receives any remaining money for other expenses and they may choose whether to receive the funds as cash, check, credit to a bank account, or another way. Federal loan funds are disbursed at least twice a year, but some loans are paid out more frequently.

Private loans are more flexible in that they can be used for any education-related expenses, including food, clothing, overseas travel, parking, and equipment such as computers.

How do the loans work when you’re still in school?

For recipients of federally subsidized loans, your interest is paid for you by the federal government while you are enrolled in school and during the grace period, shortly following graduation. If you have unsubsidized loans, the government does not pay your interest for you. This means that interest will accrue while you are in school and will be tacked on to your student loan principal balance following the grace period.

Like unsubsidized federal loans, private student loans accrue interest while you are in school. One big difference between private student loans and federal is that private lenders may also require loan payments while a student is in school.

How does student loan repayment work?

During your student loan repayment period, you will be required to make monthly payments on your balance until you have paid back your student debt in full.

Federal loans typically offer many repayment options to students who cannot make payments, such as deferment and forgiveness programs. Students who have trouble paying back federal loans may temporarily postpone or lower payments, and tie monthly payments to income. Students who work in certain public service after graduation also may be eligible to have a portion of their loan forgiven.

Students taking out private loans should check with their lenders for repayment requirements since they will vary by lender. It’s important to remember to pay on time every month to avoid defaulting on your student loans. If you are struggling to make your payments, be sure to keep your lender in the loop. Some lenders may be willing to work with you when it comes to your repayment terms.