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In a nutshell
Student loans are a viable option for those looking to pay the high costs of college, but borrowing too much money can cause financial problems down the road.
- There are generally two types of student loans: federal student loans and private student loans.
- Repayment of student loans typically begins six months after graduation.
- Applicants should fill out the Free Application for Federal Student Aid (FAFSA) to begin the federal loan process.
How student loans work
Student loans are designed to help potential college students and their parents pay higher education costs and fees. There are two types of student loans, federal and private, and both have different qualification requirements. For a private student loan, you’ll likely need a cosigner with good credit to secure a loan.
Once you’ve applied for financial aid at your school of choice, the type of student loan you choose depends mainly on how much you need to borrow. Federal student loans have annual and lifetime borrowing limits, so private student loans may work better if you need to borrow more money.
Most student loans are paid directly to the learning institution, and any leftover funds are usually paid to the student, who can then use the money to buy books or for other qualified expenses.
Types of student loans
As noted above, student loans are generally divided into two categories: federal and private. A federal student loan is any loan offered by the U.S. Department of Education. Federal student loans usually have lower interest rates and longer repayment schedules. Private student loans are loans provided by banks or other financial institutions. They generally have higher interest rates and more rigid repayment terms.
Understanding federal student loan types can be challenging, so we’ve outlined them in better detail in the section below. Additionally, we take a look at federal versus private student loans, so you can choose which might work better for you.
Direct Subsidized Loans
These loans are for undergraduate students with exceptional financial need. The federal government pays the interest while you’re enrolled in school and for the first six months after you graduate or leave school. The government will also pay accruing interest if your loans are in a qualified deferment.
Direct Unsubsidized Loans
Available to undergraduates and graduate students, this student loan begins accruing interest immediately and isn’t based on financial need.
Direct PLUS Loans
PLUS loans are available to the parents of undergraduate students, as well as graduate and professional students, who don’t have other options to pay for school. PLUS loans require a credit check, and the maximum amount parents can borrow is based on your school’s full attendance cost, minus any financial aid like grants or scholarships you may receive.
Direct Consolidation Loans
You’ll need to obtain a new loan for every semester or quarter enrolled in school. With a direct consolidation loan, you can roll all of your federal student loans into one loan with a single loan servicer. This can help streamline your payments in the future.
The Federal Perkins Loan
This type of federal loan is offered by your school of choice rather than the federal government. It is offered to students with exceptional financial need and has a low fixed interest rate of 5%. However, not all schools offer them.
Private student loans
Private student loans can help if you’ve exhausted other options to pay for college. However, unlike federal student loans, private student loans can be more expensive and less flexible with their repayment terms.
Private student loans may require you to start making payments as soon as you receive them, like a car loan or a mortgage. You’ll likely need to have a decent credit score, which may be challenging if you’re a student without much of a credit history. And if you can’t qualify on your own, you’ll likely need a cosigner, which could impact that person’s credit and finances in the future if you’re unable to make your payments.
How to apply
The first step in applying for any type of student loan is to fill out the FAFSA form. On this form, you’ll list background and financial details, which will help determine if you’re eligible for any federal grants or loans. Once completed, the information you provide on the FAFSA will generate your Student Aid Index (SAI), which is the amount of money the government thinks you can afford to pay to go to college.
Once you’ve received your SAI, the schools you’ve applied to will calculate the cost of attending there and how the fees can be paid using grants, scholarships, work-study and loans. This information will be detailed in a financial aid award letter, and you can decide to accept some or none of the loans offered.
Student loan payment pauses
It’s possible to pause the payments on federal student loans in certain instances. During the COVID-19 pandemic, the federal government paused payments for all federal student loan borrowers, regardless of financial standing, due to high unemployment and uncertain economic conditions. Private student loans may be paused during financial uncertainty for a borrower, but it will vary by lender.
There are two types of payment pauses with federal student loans: deferment and forbearance. When a borrower is in deferment, this typically means they are attending school or have become temporarily unemployed. Deferment lengths can vary, and interest doesn’t accrue on subsidized federal loans. When a borrower seeks a forbearance, it’s up to their loan servicer and is valid for 12 months. Borrowers don’t need a specific reason to ask for a forbearance, but interest continues to accrue on all loans during this period.
How to repay student loans
There’s been a lot in the news lately about student loans, and borrowers should pay attention to see if any new changes can help them during the repayment process. Generally speaking, repayment schedules for federal student loans are from 10 to 25 years, and begin six months after graduation or leaving school. You can choose to set up automatic payments for your loans, which can help streamline the process, and some lenders may reduce your interest rates when doing so.
The best way to keep up with the latest changes for your federal student loans is by visiting the federal government’s website at studentaid.gov where you’ll find the latest updates.
Private student loans are a different matter, and the details outlined in your loan contract will determine your repayment schedule.
Private vs. federal student loans
There are several differences between private and federal student loans. Here’s a quick look at each of them so you can decide which one might work for your financial situation and educational goals.
| Loan type | Federal student loans | Private student loan |
|---|---|---|
Lifetime loan amounts | $31,000 for dependent students; $57,500 for independent students* | Varies by lender |
Interest rate | Fixed | Variable |
Repayment schedule | Starts at 10 years | Varies by lender |
Credit check | No | Yes |
Forbearance | Yes | Varies by lender |
Payment pause | Yes | Varies by lender |
Need a co-signer | Depends on loan type | Generally, yes |
*Federal limits are for undergraduate education.
If the school of your choice is expensive and you’ve exhausted all your financial resources, a private student loan may be a better choice. However, potential borrowers should keep in mind that private lenders aren’t as flexible with their payment options and may not offer income-driven plans or forbearance opportunities should they fall into economic hardships.
Student loan alternatives
If you’re trying to avoid student loans altogether, you should look for other ways to pay for your education. Here’s a quick rundown of student loan alternatives that might be useful for your situation.
- Grants and scholarships from your school of choice.
- Internships and apprenticeships in hard-to-fill industries like plumbing and construction.
- G.I. Bill offered through the military.
- Work study and part-time jobs.
- Look for a more affordable college.
- Tuition reimbursem*nt from a job or industry.
- Crowdfunding.
While these alternatives might not cover all your college expenses, they are a great way to think creatively and help you reduce some of your educational costs.
The AP Buyline roundup
As costs continue to rise at many universities, going to college is a dream many can’t afford without financial assistance. Although many institutions of higher education offer grants and scholarships to students, it’s often not enough to cover the costs. For many students, federal and private student loans are a viable option, but they shouldn’t borrow more than they can pay back.
Frequently asked questions (FAQs)
What happens if you don’t pay your student loan?
In many circ*mstances, your student loan will continue to accrue interest until you pay it off. Since the COVID-19 pandemic, many student borrowers have faced economic uncertainty, so the federal government has implemented several ways to defer and help you stay current with your student loans. If you’re suffering from financial hardship, talk with your loan servicer right away about options to keep your loans out of default.
If you decide not to repay your student loan and don’t enter into an arrangement with your loan originator, your loans may go into default. This can result in wage garnishment and seizure of your tax refunds to pay off the debt. Some student loans may be discharged if you file for bankruptcy in certain situations.
How much money can I borrow in federal student loans?
The amount of money you can borrow in federal student loans for the 2023-2024 school year, according to studentaid.gov, are as follows:
- Dependent students: $31,000 total, with up to $23,000 in subsidized loans.
- Independent undergraduates: $57,500 total, with up to $23,000 in subsidized loans.
- Graduate and professional students: $138,500 total, with up to $65,500 in subsidized loans.
What is the most common type of student loan?
The most common type of student loans are federal student loans. There are four types of federal loans, both subsidized and unsubsidized, and they include the following:
- Direct Subsidized Loans.
- Direct Unsubsidized Loans.
- Direct PLUS Loans.
- Direct Consolidation Loans.
Each loan type has specific borrowing requirements, and students generally need to reapply every year they attend school in case their financial situation has changed.
AP Buyline’s content is created independently of The Associated Press newsroom. Our evaluations and opinions are not influenced by our advertising relationships, but we might earn commissions from our partners’ links in this content. Learn more about our policies and terms here.
