If you are in need of college funding, you may be contemplating a student loan. But before applying for one, it is essential to understand how they operate.

Student loans are borrowed monies that you must eventually repay, together with any interest or fees that may be incurred. In order to borrow and repay student loans with confidence, learn how they work in the sections below.

What is a Student Loan?

If you lack the funds to pay for education, a student loan will allow you to borrow money and repay it with interest at a later period.

Grants and scholarships are different from student loans. When you accept a grant or scholarship, you do not incur debt. This is money that you have received as a gift and do not need to repay.

How Do Student Loans Work?

Due to the fact that you are not only paying back the amount you borrowed, but also interest, it is essential to understand how much this will add to the overall amount you pay.

The amount of interest you pay depends on several variables, including whether your loan is subsidized or unsubsidized, the interest rate on your loan, the amount you borrow, and the length of your loan.

For instance, you want to repay a $10,000 loan with a 5% interest rate over the course of ten years. You will pay $2,728 in interest during the course of the loan’s repayment period of 10 years.

The main balance (amount borrowed) and interest will be included in your monthly loan payment. The entire amount repaid, including principal and interest, will be $12,728.

Generally, interest continues to accrue throughout forbearances and other non-payment periods. Therefore, if you delay loan repayment or miss a payment, the entire cost of the loan will increase, and not simply due to late fees.

Loan payments are applied in a specific order to the loan balance. The amount is initially used to late fees and collection fees.

The amount is then added to the interest accrued since the last payment. Any residual funds are then applied to the principal debt. Therefore, if you pay more each month, you will reduce the debt more quickly.

You can use a loan calculator to determine the exact amount of interest you will pay.

Which Student Loan Types Are Available?

There are two primary categories of student loan lenders. The federal government gives student loans. Private student loans are offered by banks, credit unions, state loan agencies, and other financial entities.

It is easy to become confused, as some lenders that offer private student loans also manage federal student loans on behalf of the U.S. government.

Federal loans

Federal student loans are loans provided by the United States government. It is advisable to obtain federal loans initially because they are less expensive and typically come with more perks than private loans.

The benefits of a federal loan over a private loan are as follows:

  • Lower and fixed interest rates
  • The capacity to obtain credit without a cosigner.
  • Repayment programs that begin six months after college graduation or less than half-time enrollment.
  • Flexible repayment programs, such as income-based repayment and extended payback, are available.
  • There is also the possibility that some of your student loans will be forgiven, meaning you won’t have to pay them back, if you work in certain fields, such as teaching and public service.

There are four categories of federal college student loans:

Direct Subsidized Loan

Students with verified financial need are eligible for Stafford loans with a subsidy. While enrolled at least half-time in college and for six months after graduation or dropping below half-time enrollment, you will not be required to pay interest on your loan. This is a significant cost savings.

Direct Unsubsidized Loan

Undergraduate and graduate students, regardless of financial need, are eligible for unsubsidized Stafford loans. In contrast to subsidized loans, you must pay the interest that has been collected on your loan while you are still in school or it will be capitalized (added to the loan balance).

Federal Direct PLUS loan

Graduate students and parents of dependent undergraduate students are eligible for Grad PLUS and Parent PLUS loans. PLUS loans are not subsidized, thus interest will begin to accrue after the loan has been fully issued.

Repayment may be postponed during college enrollment and for six months following graduation.

Direct Federal Consolidation loan

Consolidation loans enable you to consolidate several federal student loans into a single loan without losing access to their advantages. Repayment can be streamlined by consolidation, as well as loan servicers.

Private loans

Private student loans are those issued by a private lender, typically a bank, credit union, state loan agency, or non-bank financial entity. They can have fixed or variable interest rates and frequently demand a cosigner from the student borrower.

There is no interest subsidy, so as soon as you borrow money, interest will accrue.

How to Reduce Interest Costs

You can reduce the amount of interest you pay by making additional loan payments or by refinancing your student loan into one with a lower interest rate.

However, refinancing federal student loans into private loans results in the loss of numerous benefits, including income-based repayment options, the possibility of loan forgiveness or broad forgiveness, extensive deferment options, and death and disability discharges.

How Do You Submit an Application for Student Loans?

The application procedures for federal and private student loans are distinct. Remember that you should only apply for a private student loan after all federal student loan alternatives have been exhausted.

Federal student loan process

To apply for a federal student loan, fill out the Free Application for Federal Student Aid (FAFSA) (FAFSA). The information provided on the FAFSA will influence the amount of money you can borrow.

Your college will send you an offer of financial aid that includes information on how to accept your loan. Then, you must sign a Master Promissory Note (MPN).

Private student loan process

To apply for a private loan, FAFSA is not required. You must submit a loan application to an individual lender. The lender will assess your credit score and will frequently require a cosigner with excellent credit.

How Much Can Be Borrowed?

Because you must repay the money you borrow with your student loans for education, you should only borrow the amount that you truly require. The maximum amount you can borrow varies by type of loan. For federal loans, the amount you can borrow is determined by your college, however there are limits:

Federal Direct Stafford Loans for undergraduates have annual borrowing limitations ranging from $5,500 to $7,500 for dependent students and $9,500 to $12,500 for independent students, depending on the academic year.

Graduate Federal Direct Stafford Loans: The annual borrowing limit for graduate and professional students is up to $20,500 and for medical school students it is up to $40,500.

The maximum amount that can be borrowed from a private lender varies. The majority of lenders do not permit you to borrow more than the cost of attendance minus alternative financial aid.

Direct loans are also subject to aggregate loan limits, indicating that there is a maximum amount of outstanding loans you can have.

In general, the borrowing limit for Federal Direct PLUS loans equals the remainder of college expenses not covered by Federal Direct Stafford loans and other forms of financial aid.

When Should You Repay Your Loans?

Federal Direct Stafford loans must be repaid within six months of graduation, dropping below half-time attendance, or leaving school. Prior to 2008, Federal Direct PLUS loans were due for repayment within 60 days of full disbursement.

However, since 2008, borrowers have had the option of delaying repayment until six months after the student graduates or drops below half-time enrollment.

The terms of private loan repayment are determined by the lender. You may discover that your lender needs you to make loan payments while you are still in school, while there may be opportunities to defer (postpone) loan payments. During an in-school deferment and grace period, interest accrues.


If you lack the funds to pay for college, student loans are an excellent way to finance your education. However, it is essential to comprehend how loans operate so there are no shocks when it comes time to begin loan repayment.

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