Everything You Need to Know About College Loans

college loans

In the 2016-17 school year, undergraduate students received an average of $4,620 in federal loans and graduate students received an average of $17,710 in federal loans, according to The College Board.

If you’re attending school now or will be soon, you might need to take out college loans of your own. Before you borrow, however, it’s a good idea to learn how student loan borrowing works.

Read on to find out everything you need to know to borrow money for school in an effective, affordable way.

Types of college loans

There are three primary options for college loans: federal student loans available to students; federal student loans available to parents; and private student loans available to either parents or students.

Federal student loans

Federal student loans have some significant advantages over private loans. As the Consumer Financial Protection Bureau explains, advantages of federal student loans include the following:

  • Federal loans provide more flexibility in repayment options in case of financial hardship. Loans can be put into deferment or forbearance so you can temporarily stop making payments.
  • All federal loans have fixed rates, while some private loans have variable interest rates. If interest rates are variable, interest — and cost of borrowing — can increase.
  • Interest on some federal loans is subsidized while you’re in school, which means you save money because interest doesn’t accrue while you get your education.
  • Interest rates for federal loans are set based on loan type, while interest rates for private loans vary based on your credit score and other factors.

There are limits on the amount that you can borrow from the federal government. If students have exhausted options for federal financial aid, parents will need to apply for either Direct PLUS Loans, which are federal loans for parents, or parents or students will need to apply for private loans.

Private student loans

Qualifying for private student loans is very different from qualifying for federal student loans. Private student loan lenders look at your income and credit score to determine if you qualify. If your income is too low, a private lender may not allow you to borrow. Because many students have low or no income, and because many students have not yet built credit, private loans may not be an option without a cosigner. If you can qualify, some of the advantages of private student loans, including:

  • The ability to obtain additional funding for school once you have exhausted your options for federal loans.
  • Private student loans are not restricted based on financial need as some federal loans, such as Direct Subsidized loans are.
  • Private student loans are available if you did not fill out theFree Application for Federal Student Aid (FAFSA).

You should consider private student loans only after you’ve exhausted options for federal student loans. Many different lenders offer private student loans, so you should comparison shop to find loans with the most favorable terms. Key criteria to consider when shopping for private loans include:

  • Eligibility requirements to qualify for the loan
  • Time to repay the loan
  • Loan application or origination fees
  • Interest rates

Our private student loan marketplace is an excellent place to start looking for private loans. You can find options for both undergraduates and graduate students. Parents can also apply directly for private student loans in their name, but their income and credit also affect eligibility.

Repaying private student loans can be more difficult for students and parents because there are problems with private student loan repayment options. Private student loans do not offer income-based repayment plans or loan forgiveness. And, while you can put federal student loans into deferment or forbearance if you experience financial hardship, this is not the case with private student loans.

Federal student loan options for undergraduates

Between the 2006-07 school year and the 2016-17 school year, federal loans to undergraduates increased by 23 percent, according to The College Board. Fortunately, there are many options for federal loans for students attending an undergraduate program, including:

  • Subsidized Stafford Loans. With subsidized loans, the government pays interest costs while the student is in school or if the student is in deferment.
  • Unsubsidized Stafford Loans. With unsubsidized loans, the student is responsible for paying interest. Interest can continue to accrue while the student is in school, in deferment or in forbearance.

Stafford Loans are also called Direct Subsidized Loans and Direct Unsubsidized Loans. This chart shows the limits for Direct Loans available to undergrads and grad students.

Year Dependent Students (except those whose parents cannot obtain PLUS Loans) Independent Students
(and dependent undergrads whose parents can’t obtain PLUS Loans)
First-Year Undergraduate Loan Limit Up to $5,500.
A maximum of $3,500 can be in subsidized loans.
Up to $9,500.
A maximum of $3,500 can be in subsidized loans.
Second-Year Undergraduate Annual Loan Limit Up to $6,500.
A maximum of $4,500 can be in subsidized loans.
Up to $10,500.
A maximum of $4,500 can be in subsidized loans.
Third-Year & Beyond Undergraduate Annual Loan Limit Up to $7,500.
A maximum of $5,500 can be in subsidized loans.
Up to $12,500.
A maximum of $45,500 can be in subsidized loans.
Graduate or Professional Students Annual Loan Limit Does not apply.
All graduate and professional students are independent.
Up to $20,500.
None can be subsidized.
Subsidized & Unsubsidized
Aggregate Loan Limit
Up to $31,000.
A maximum of $23,000 can be in subsidized loans.
Up to $57,500 for undergraduates or $138,500 for graduates or professional students.
A maximum of $23,000 of loans can be subsidized for undergraduates.
A maximum of $65,000 of loans can be subsidized for graduate or professional students, with the aggregate limit including federal loans received as an undergrad.

Source: Department of Education

Undergraduates used to have access to another option, Perkins Loans, but the Perkins Loans program has expired.

Parents can also borrow for undergraduates using Direct PLUS Loans, which are also available from the federal government. The maximum loan amount is equal to the cost of attendance minus other financial aid.

Both parents and students could also potentially take out private loans to pay for an undergraduate education. However, as mentioned above, undergraduates may have trouble qualifying without a cosigner.

How do student loans work for graduate school or professional school?

For students attending graduate school or professional school, there are different options for loans. Federal student loans for graduate or professional school include:

  • Direct Unsubsidized Loans. Eligible students may borrow up to $20,500 per school year, according to the Department of Education. Additional loans may be available for certain students enrolled in health profession programs.
  • Direct PLUS loans. Students may borrow up to the cost of attendance, minus other financial aid. A credit check is performed.

Graduate and professional students can also apply for private student loans to cover additional costs for their education. Because graduate and professional students may have had the chance to establish credit and may have more income than undergraduate students, they may be able to qualify for private loans more easily than undergrads.

How do students apply for federal loans?

To apply for federal loans, students will need to complete the FAFSA. You can complete your FAFSA online at the FAFSA website or can request a paper FAFSA by calling 1-800-4-FED-AID. You usually should try to complete the FAFSA in October when it becomes available because aid may be limited and you could lose out if you wait.

To complete the FAFSA, you will need to provide information about your income and your parent’s income, details about investments and assets, details about the schools you are applying to, and information about other sources of college funds such as scholarships and grants. You can check out our ultimate guide to filling out the FAFSA to find more information.

How does federal student loan interest work?

When you borrow money to go to school, you’ll pay interest. Interest rates for federal loans are set based on loan type. This chart shows the current interest rates for federal student loans.

Loan Type Borrower Type School Year
2016-17
School Year
2017-18
Direct Subsidized Undergraduate 3.76% 4.45%
Direct Unsubsidized Undergraduate 3.76% 4.45%
Direct Unsubsidized Graduate/Professional 5.31% 6.00%
Direct Grad PLUS Graduate/Professional 6.31% 7.00%
Direct Parent PLUS Parent 6.31% 7.00%

Interest rates are fixed for federal loans, so they will not change after you have accepted the loan. Interest rates are not based on your credit score, so everyone who applies will get the same interest rate.

Interest rates for private loans, on the other hand, vary by lender and can be impacted based on your credit score and other factors, including the length of your loan term. Average student loan rates for private loans are around 7%, and higher interest rates mean it will cost you more money to repay your loans. On the other hand, repaying your loan faster will reduce the total amount of interest that you must pay.

How are federal college loans paid back?

Repayment on Direct Loans is not required while you are in school or for six months after graduation, according to the Department of Education. However, PLUS Loans enter repayment as soon as they are dispersed, unless you apply for deferment. Parents can complete this Parent PLUS Loan Borrower Deferment Request form to request a deferment.

Once you graduate and begin repayment, you have different student loan repayment options. This table from the Department of Education shows different repayment options for different loan types.

Repayment Plan Eligible Loans Monthly Payment and Time Frame Eligibility and Other Information
Standard Repayment Plan Direct Subsidized and Unsubsidized LoansSubsidized and Unsubsidized Federal Stafford Loans
all PLUS loans
all Consolidation Loans (Direct or FFEL)
Payments are a fixed amount.
Up to 10 years (up to 30 years for Consolidation Loans).
All borrowers are eligible for this plan.
You’ll pay less over time than under other plans.
Graduated Repayment Plan Direct Subsidized and Unsubsidized Loans
Subsidized and Unsubsidized Federal Stafford Loans
all PLUS loans
all Consolidation Loans (Direct or FFEL)
Payments are lower at first and then increase, usually every two years.
Up to 10 years (up to 30 years for Consolidation Loans).
All borrowers are eligible for this plan.
You’ll pay more over time than under the 10-year Standard Plan.
Extended Repayment Plan Direct Subsidized and Unsubsidized Loans
Subsidized and Unsubsidized Federal Stafford Loans
all PLUS loans
all Consolidation Loans (Direct or FFEL)
Payments may be fixed or graduated.
Up to 25 years.
If you’re a Direct Loan borrower, you must have more than $30,000 in outstanding Direct Loans.
If you’re a FFEL borrower, you must have more than $30,000 in outstanding FFEL Program loans.
Your monthly payments will be lower than under the 10-year Standard Plan or the Graduated Repayment Plan.
You’ll pay more over time than under the 10-year Standard Plan.
Revised Pay As You Earn Repayment Plan (REPAYE) Direct Subsidized and Unsubsidized Loans
Direct PLUS loans made to students
Direct Consolidation Loans that do not include PLUS loans (Direct or FFEL) made to parents
Your monthly payments will be 10 percent of discretionary income.
Payments are recalculated each year and are based on your updated income and family size.
If you’re married, both your and your spouse’s income or loan debt will be considered, whether taxes are filed jointly or separately (with limited exceptions).
Any outstanding balance on your loan will be forgiven if you haven’t repaid your loan in full after 20 or 25 years.
Any Direct Loan borrower with an eligible loan type may choose this plan.
You’ll usually pay more over time than under the 10-year Standard Plan.
You may have to pay income tax on any amount that is forgiven.
Good option for those seeking Public Service Loan Forgiveness (PSLF).
Pay As You Earn Repayment Plan (PAYE) Direct Subsidized and Unsubsidized Loans
Direct PLUS loans made to students
Direct Consolidation Loans that do not include (Direct or FFEL) PLUS loans made to parents
Your maximum monthly payments will be 10 percent of discretionary income.
Payments are recalculated each year and are based on your updated income and family size.
If you’re married, your spouse’s income or loan debt will be considered only if you file a joint tax return.
Any outstanding balance on your loan will be forgiven if you haven’t repaid your loan in full after 20 years.
You must be a new borrower on or after Oct. 1, 2007, and must have received a disbursement of a Direct Loan on or after Oct. 1, 2011.
You must have a high debt relative to your income.
Your monthly payment will never be more than the 10-year Standard Plan amount.
You’ll pay more over time than under the 10-year Standard Plan.
You may have to pay income tax on any amount that is forgiven.Good option for those seeking Public Service Loan Forgiveness (PSLF).
Income-Based Repayment Plan (IBR) Direct Subsidized and Unsubsidized Loans
Subsidized and Unsubsidized Federal Stafford Loans
all PLUS loans made to students
Consolidation Loans (Direct or FFEL) that do not include Direct or FFEL PLUS loans made to parents
Your monthly payments will be 10 or 15 percent of discretionary income.
Payments are recalculated each year and are based on your updated income and family size.
If you’re married, your spouse’s income or loan debt will be considered only if you file a joint tax return.
Any outstanding balance on your loan will be forgiven if you haven’t repaid your loan in full after 20 or 25 years.
You may have to pay income tax on any amount that is forgiven.
You must have a high debt relative to your income.
Your monthly payment will never be more than the 10-year Standard Plan amount.
You’ll pay more over time than under the 10-year Standard Plan.
Good option for those seeking Public Service Loan Forgiveness (PSLF).
Income-Contingent Repayment Plan (ICR) Direct Subsidized and Unsubsidized Loans
Direct PLUS Loans made to students
Direct Consolidation Loans
Your monthly payment will be the lesser of 20 percent of discretionary income, or the amount you would pay on a repayment plan with a fixed payment over 12 years, adjusted according to your income.
Payments are recalculated each year and are based on your updated income, family size, and the total amount of your Direct Loans.
If you’re married, your spouse’s income or loan debt will be considered only if you file a joint tax return or you choose to repay your Direct Loans jointly with your spouse.
Any outstanding balance will be forgiven if you haven’t repaid your loan in full after 25 years.
Any Direct Loan borrower with an eligible loan type may choose this plan.
You’ll usually pay more over time than under the 10-year Standard Plan.
You may have to pay income tax on the amount that is forgiven.
Good option for those seeking Public Service Loan Forgiveness (PSLF).
Parent borrowers can access this plan by consolidating their Parent PLUS Loans into a Direct Consolidation Loan.
Income-Sensitive Repayment Plan Subsidized and Unsubsidized Federal Stafford Loans
FFEL PLUS Loans
FFEL Consolidation Loans
Your monthly payment is based on annual income.
Up to 15 years.
You’ll pay more over time than under the 10-year Standard Plan.
The formula for determining the monthly payment amount can vary from lender to lender.

Our guide showing average student loan payments under different repayment plans shows how these different repayment options could impact a typical student loan. You can also use our student loan payment calculator to find out what your payments would be with different repayment periods.

If you’ve taken out Parent PLUS loans, you have fewer options because Parent PLUS loans are not eligible for Income-Based Repayment or Pay-As-You-Earn programs. However, if parents consolidate through a Direct Loan Consolidation Loan, they can become eligible for an Income-Contingent Repayment Plan. You can learn more about different repayment options in our Parent PLUS loan repayment guide.

Private lenders each set their own rules for repayment of student loans so you will need to consult with your lender to find out what the repayment term is.

Now you know how college loans work

Now you know how college loans work so you can make an informed choice when you borrow money to go to school. Ideally, you should try to borrow the minimum you need to fund your education so it will be easier to repay your loans when you graduate.

The good news is, there are options to help you repay your student loans, so you should be able to fund your education and find a repayment plan that works for you.

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