How Do Student Loans Work, and Where Do You Apply?

Student loans get a bit of a bad rep in the news related to the amount of debt they cause. But if you’re looking to advance your career with a necessary degree, student loans might offer a way to pay for your education so you can improve your future. Understanding exactly how student loans work and how to manage them properly goes a long way toward having a positive experience.

So how do student loans work? Here’s what you’ll learn:

• Student Loans: Federal vs. Private Options
• Different Types of Federal Student Loans 
• How Do You Get a Student Loan? 
• How Does Paying Back Student Loans Work? 
• What is Student Loan Forgiveness?
• How Does Student Loan Interest Work?

Student Loans: Federal vs. Private Options

When you’re considering student loans, there are two major categories. First are federal student loans. These are loans that are owned or backed by the federal government.

Because of the federal government’s involvement, these loans are seen as less risky for lenders, which can lead to lower interest rates. Most federal loans also don’t require a credit check.

Private student loans are offered by commercial lenders without any backing from the federal government. They are typically based on the same credit requirements as other types of lending, so factors such as credit score and income can play a role in whether or not you can get these loans.

Different Types of Federal Student Loans

The U.S. Department of Education has a federal loan program. It’s called the Direct Loan Program and includes four major types of loans. They include:

• Unsubsidized loans. These funds can be used for all levels of post-secondary education, including undergrad, graduate and professional studies.
• Subsidized loans. These funds can be used for undergrad studies at technical or career schools or four-year colleges. Subsidized loans are based on need, so your household must meet certain income qualifications to be considered for these loans.
• PLUS loans. You can seek a PLUS loan to help pay for educational expenses that aren’t covered by other loans or financial aid options. PLUS loans can be taken by the student or the parent if the student is a dependent. Unlike other federal student loans, PLUS loans do depend on your credit score.
• Consolidation loans. You might take out multiple loans as you go through school. That can leave you with various payments and accounts to manage, which might be inconvenient. A direct consolidation loan lets you combine eligible federal student loans into a single loan to minimize account management issues.

How Do You Get a Student Loan?

How you get a student loan depends on whether you’re applying for federal or private options. The first step in applying for any federal student loan is completing the Free Application for Federal Student Aid form, which is also called the FAFSA.

To complete the FAFSA, you need:

• Information about your household income, which may be your parent’s information.
• To have filed a tax return for the previous year—or your parents must have filed one, if you’re a dependent.
• The schools you are interested in attending, as you have to include them on the FAFSA form.

Once your FAFSA is processed, information about your financial aid options, including loans, is sent to the schools you applied to. The schools then present you with a financial aid package so you can consider your options and agree to accept any grants, loans or other aid.

Applying for private student loans is different. The FAFSA doesn’t cover those. You have to apply with the bank or other lender individually, just as you would apply for a car loan.

You can shop around for private student loan rates as you would for rates on a mortgage or car loan without a huge hit to your credit. The credit scoring models typically count several applications for a student loan in a short time period as one event when it comes to the impact of a hard inquiry on your report. If you’re not sure where to start, consider shopping and applying for a student loan online.

How Does Paying Back Student Loans Work?

Student loans work similar to other credit. Eventually, you have to pay back the loans, and interest typically accrues until you do so. Most student loans are structured so that you pay a certain amount each month over a set period of time.

When Do You Start Repaying Student Loans?

Student loans differ from other loans in one major way. Many lenders don’t require that you start paying back the loan until you’re out of school. The idea is that you borrow the money to pay for your education and you pay it back once you’re able to put that education to work earning money.

Most federal student loans don’t require that you start making payments until 6 months after you exit school full time. That means you graduate, decide to stop going or you drop under full-time status.

Private student loan lenders offer variable options. Always carefully read the details of a private student loan so you understand exactly when repayments will begin.

Deferments, Forbearance and Income-Driven Repayment Plans

Federal student loans are extremely forgiving in the sense that there are many options for assistance if you can’t pay your student loans. You can apply for deferment or forbearance, which lets you stop paying on your loans without them being considered late for credit-reporting purposes. You can also apply for income-driven repayment plans to alter your payments to better fit your budget.

During the COVID-19 pandemic of 2020, the federal government even passed bills such as the CARES Act that included automatic forbearance of student loans for a period of time, for example. Because there are so many options to pay back federal student loans, it’s important to contact your lender if you’re ever struggling to do so.

What Is Student Loan Forgiveness?

In some cases, you might be able to get some or all of your student loans forgiven. This typically is an option when you go into public sector work or work in a career that’s in high demand and serves the public, such as health care.

How Does Student Loan Interest Work?

Interest accrues on student loans—and it probably accrues even when you’re in forbearance, deferment or a grace period. Typically, the longer you wait to pay your student loans, the more interest accrues. That means you pay more for your loan over time.

Not all deferments or forbearance options require you to pay the interest, so always make sure you understand the fine print on any option dealing with your student loan. And if you have a subsidized federal student loan, the Department of Education covers the interest on your loan while you’re in school.

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