How Do Student Loans Work For College

Last Updated on December 22, 2022

Student loans are a huge burden for many students and graduates. Some choose to pay them off, but others are left with a mountain of debt that they can’t seem to climb. If you’re wondering how you can get out of student loan debt, there are several solutions.

One option is refinancing your student loans. This means that your lender will find another lender willing to give you a lower interest rate and better terms, allowing you to pay less over time. However, this isn’t always possible if your credit score isn’t high enough or if your debt is too large.

Another option is consolidation, which allows you to combine all of your student loans into one monthly payment. However, this may not always be possible either because it requires good credit or because it could actually make things worse by increasing the amount due each month!

If neither refinancing nor consolidation work for you, then perhaps consolidating an eligible private loan with an eligible federal loan will do the trick. It’s important to note that this process may take some time before it’s complete so make sure you plan ahead!

How Do Student Loans Work For College

Step 1: Fill Out the FAFSA
The first step in applying for student loans is to fill out the government’s Free Application for Federal Student Aid (FAFSA). The FAFSA asks a series of questions about the student’s and parents’ income and investments, as well as other relevant matters such as whether the family will have more than one child in college at the same time. Based on the information you supply, the FAFSA will calculate your Expected Family Contribution (EFC). That’s the amount of money the government believes you should be able to pay for college for the coming school year out of your own financial resources.

You can complete the FAFSA online at the office of the Federal Student Aid website.1 To save time, round up all of your account information before you sit down to start work on it. You must not only complete the FAFSA when you first apply for aid but every year after that if you hope to continue receiving aid.

Step 2: Compare Your Financial Aid Offers
The financial aid offices at the colleges you apply to will use the information from your FAFSA to determine how much aid to make available to you. They compute your need by subtracting your EFC from their cost of attendance (COA). Cost of attendance includes tuition, mandatory fees, room and board, and some other expenses. It can be found on most colleges’ websites.

In order to bridge the gap between your EFC and their COA, colleges will put together an aid package that may include federal Pell Grants and paid work-study, in addition to loans. Grants, unlike loans, do not need to be paid back, except in rare instances. They are intended for students with what the government considers “exceptional financial need.”

Award letters can differ from college to college, so it’s important to compare them side by side. In terms of loans, you’ll want to look at how much money each school offers and whether the loans are subsidized or unsubsidized.

Direct subsidized loans, like grants, are meant for students with exceptional financial need. The advantage of subsidized student loans is that the U.S. Department of Education will cover the interest while you’re still at least a half-time student and for the first six months after you graduate.

Direct unsubsidized loans are available to families regardless of need, and the interest will start accruing immediately.2

Payments and interest on these loans was suspended in 2020 during the economic crisis, with both resuming in mid-2022.3

If you qualify, a college might offer you both subsidized and unsubsidized loans.

Federal loans have a number of advantages over student loans from banks and other private lenders. They have relatively low, fixed interest rates (private loans often have variable rates) and offer a variety of flexible repayment plans.

However, the amount you can borrow is limited. For example, most first-year undergraduates can only borrow up to $5,500, of which no more than $3,500 can be in subsidized loans. There are also limits on how much you can borrow in total over the course of your college career.5

If you need to borrow more than that, one option is a federal Direct PLUS Loan. PLUS loans are intended for the parents of undergraduates (as well as for professional and graduate students). PLUS loans have higher limits—up to the full cost of attendance minus any other aid the student is receiving—and are available regardless of need. However, the parent borrower must generally pass a credit check to prove their creditworthiness.

Step 3: Consider Private Student Loans
Another option if you need to borrow more money than federal student loans can provide is to apply for a private loan from a bank, credit union, or other financial institution.

Private loans are available regardless of need, and you apply for them using the financial institution’s own forms rather than the FAFSA. To obtain a private loan, you will need to have a good credit rating or get someone who does have one, such as a parent or other relative, to cosign on the loan.

Having less-than-stellar credit can make it difficult to qualify for student loans. Private lenders will consider your income and credit history, and as a college student, you likely have poor credit or no credit at all. However, some lenders offer student loan options for borrowers with bad credit.

Generally, private loans carry higher interest rates than federal loans, and these rates are variable rather than fixed, which adds some uncertainty to the question of how much you’ll eventually owe. Private loans also lack the flexible repayment plans available with federal loans and are not eligible for loan consolidation under the Federal Direct Consolidation Loan program. However, you can refinance your private loans after you graduate, possibly at a lower interest rate.

Each college will notify you of how much aid it is offering around the same time that you receive your official acceptance. This is often referred to as an award letter. In addition to federal aid, colleges may make money available out of their own funds, such as merit or athletic scholarships.

Step 4: Choose Your School
How much you’ll have to borrow to attend one college versus another may not be the most important factor in choosing a college. But it should definitely be high on the list. Graduating from college with an unmanageable amount of debt—or, worse still, taking on debt and not graduating—is not only a burden that might keep you up at night; it can limit—or even derail—your career and life choices for years to come. Also factor in the future careers you are considering when you choose to pay more for college. A career with a high entry-level salary will put you in a better position to repay your loans and justify taking on more debt.

how do student loans work for graduate school

While there are several ways to borrow money, the two general types of loans specifically designed for graduate students are federal loans and private loans. We’ll cover the differences between them, but there are some shared features:

You have to pay them back with interest.
Interest begins to accrue (grow) from the day that your graduate student loan is disbursed (sent) to your school. Learn more about interest.
There’s a grace period.
You’ll generally have six or more months after leaving graduate school before you begin making principal and interest payments on federal student loans. (The grace periods for private loans will vary depending on the lender.) Loans specifically for professional programs like law, medical, and dental degrees may have a longer grace period.
They’re disbursed directly to your graduate school.
Unlike personal loans or loans for some career-related activities (residency and relocation), the graduate student loan money goes to the school’s financial aid office, not to you.
Federal loans for graduate students
There are two types of federal loans for graduate students.1 While both are funded by the federal government, there are differences in interest rate, and how much you can borrow from each.

Federal Direct Unsubsidized Loans
Federal Direct Graduate PLUS Loans
You can apply for both loans by filling out a FAFSA®. Based on the information you submit, the cost of attendance, and the amount of other financial aid you’re receiving, your graduate school will determine how much you can borrow.

Note: Direct Subsidized Loans (where the federal government pays the loan’s interest while you’re in school and during your grace period) aren’t generally available for graduate students.

Federal Direct Unsubsidized Loans1
Federal Direct Loans (also known as “Stafford Loans”) aren’t based on financial need, and you’re responsible for paying all the loan’s interest. To get a Federal Direct Loan, you must be enrolled at least part-time.

Benefits
You’ll likely receive a lower interest rate with a Federal Direct Loan than with a private graduate loan.
Federal Direct Loans usually have more flexible repayment options and benefits than a private graduate loan.
They’re not credit-based, so there’s no credit check and you don’t need an endorser.
Considerations
You’re awarded a set loan amount based on your FAFSA information, and may need more money for your graduate program.
You’re charged a “loan fee,” a percentage of the disbursed loan amount.
Federal Direct Loans only offer a fixed interest rate.
Federal Direct Graduate PLUS Loans1
If you need additional aid beyond your Federal Direct Loans, Direct Graduate PLUS Loans can help cover your graduate school costs. To get PLUS Loans, you must be enrolled at least half-time at an eligible school taking part in a program leading to a graduate or professional degree, or a certificate.1

Benefits
You can apply for your entire cost of attendance, minus any financial aid (like Federal Direct Loans) that you get.
If you have an adverse credit history, you may still be able to receive a PLUS loan if you meet additional requirements.
There are several types of loan repayment plans you can choose.
Considerations
This loan considers your credit; if you have an “adverse credit history,” you may be denied. Learn what constitutes an adverse credit history.
You’re charged a “loan fee,” a percentage of the disbursed loan amount.
The interest rate is higher than for a Federal Direct Loan. And, if you’re highly qualified, you may receive a lower interest rate with a private student loan.2
They only offer a fixed interest rate.
Private student loans for graduate students
Private student loans are offered by banks or credit unions, rather than the federal government, and you apply directly with them. A lender will consider your credit history, among other factors. If your credit isn’t up to their requirements, you may need a cosigner to increase your chance of approval.

Interest rates for private graduate loans are generally higher than for federal loans, but if you’re a highly qualified borrower, you may receive a lower interest rate than with a Direct Graduate PLUS Loan.2

Direct Graduate PLUS Loans require you to be enrolled at least half-time, but you may be eligible for private graduate student loans if you’re enrolled full-time, half-time, or less than half-time in an eligible school.

While we can’t speak to all private student loans, here are some of the benefits of Sallie Mae graduate student loans.

Benefits

You can have a choice of fixed or variable interest rates.
You can apply for a graduate school loan or one tailored for your specific field (business, medical, dental, law, or graduate health professions).
There’s no origination fee.
You can choose to make payments while you’re in graduate school or defer until after you leave.3
You can pay for all your school-certified expenses.4
If you have a cosigner on your graduate student loan, you can apply to release your cosigner.5
Considerations

Private student loans usually don’t offer the same flexibility of repayment options as federal student loans; you generally can’t change your repayment plan after you take out a private student loan.

About the author

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