You’ve done everything you needed to do to get into college: got good grades, talked to your guidance counselor, and filled out applications. But then comes figuring out how to pay for it.
Although you’ve likely heard of and applied for scholarships, you might be wondering where student loans come into play. Given the average cost of a four-year private college is $33,480 per year, loans are likely going to be part of financing your education. But, what is a student loan?
Here are the basics you should know about student loans and how they work.
What is a student loan?
A student loan is money that you borrow for college and pay back with interest. These college loans help pay for tuition, books, room and board, and other education-related costs.
Although all student loans serve the same purpose in helping you fund your education, they come from two distinct places: the government (federal student loans) and private lenders (private student loans).
How student loans work
For both federal and private student loans, you’ll need to go through an application process to find out if you’re approved and how much money you’re allowed to borrow. You’ll also learn about your repayment terms. Once you’re approved for a student loan, the money will be disbursed to your school to cover educational costs.
The process for securing a student loan is different depending on whether it’s federal or private. Knowing the differences is key to ensure you get the best repayment terms for your situation.
Types of student loans
As mentioned, there are two types of student loans: federal and private. Each has its own benefits and drawbacks.
Below are the basics of these loans, but you can also check out our complete guide for more information on how private and federal student loans differ.
Federal student loans
Loans issued by the government are considered federal student loans. There are three types: Direct Subsidized, Direct Unsubsidized, and Direct PLUS. Here’s a handy chart to understand the basic differences between them.
You have to prove financial need and be enrolled no less than half time to qualify for this type of loan. You can borrow up to $5,500 each year, depending on a few factors. The Department of Education will cover your interest charges while you’re enrolled, for the first six months after you leave school, and during deferment.
To qualify, you don’t need to prove financial need. But you must be enrolled at least half time. Undergraduates can borrow up to $12,500; graduate and professional students can borrow up to $20,500. Interest accrues while you’re in school.
4.45% for undergraduate students and 6.00% for graduate or professional students
PLUS Loans are available to parents of dependent students and graduate and professional students. To qualify, you or your parents must pass a credit check. Payments can be postponed while you’re enrolled. Interest accrues even while you’re in school.
How to apply for federal student loans
To apply for federal student loans, you must fill out the Free Application for Federal Student Aid (FAFSA). States and schools use the FAFSA to determine your eligibility for aid, from federal work-study to grants and student loans.
The application opens Oct. 1, but submission deadlines may vary based on your school and state. So, fill out the FAFSA early to ensure you qualify for the most aid.
When looking for ways to pay for school, prioritize federal student loans over private ones. Federal loans tend to have more flexible repayment terms and borrower protections. Undergraduate students can also qualify for loans without a cosigner.
Private student loans
So, what is a student loan from a private lender? Private student loans are issued by financial institutions, such as banks, credit unions, and online lenders.
As private student loans are offered by a variety of companies, the interest rates and repayment terms you’ll find will vary. Federal loans, on the other hand, have interest rates and repayment terms set by the government. That’s why it’s important to shop around with different lenders before taking out a private student loan.
How to apply for private student loans
To apply for a private student loan, you have to submit an application to each lender you’re considering. Private lenders take your credit and debt-to-income ratio into consideration when determining your eligibility for a loan. However, lenders can have different application requirements.
If approved, the lender will inform you of how much you’re allowed to borrow, your interest rate, and your repayment schedule. In many cases, private lenders will allow you to defer payments until after you leave school. However, you can expect interest to accrue starting on your disbursement date.
Since there are so many variables and a lack of regulations, you should only consider private student loans after you’ve secured federal financial aid, grants, and scholarships.
Using student loans to help pay for college
Unless you’ve scored a full ride to college or your family has enough money to pay out of pocket for school, you’re likely going to need to take out loans to cover some educational costs. If you do, you won’t be in the minority.
In fact, about 44 million people have student loans, according to our student loan debt report. And Americans owe over $1.48 trillion in student loan debt. Some borrowers have even taken out more money than they can afford to repay.
By taking the first step to understand the basics and different types of student loans, you’ll be in a much better position to make the best financial decision. Loans can be a great way to help you pay for college. But be sure to review all the details of your federal and private loans. That way, you don’t get stuck with debt you can’t pay back.
Need a student loan?Here are our top student loan lenders of 2018!
|1 Important Disclosures for CollegeAve.
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
2 Important Disclosures for Discover.
3 Important Disclosures for Ascent.
Before taking out private student loans, you should explore and compare all financial aid alternatives, including grants, scholarships, and federal student loans and consider your future monthly payments and income. Applying with a cosigner may improve your chance of getting approved and could help you qualify for a lower interest rate. Ascent Student Loans may be funded by Richland State Bank (RSB) or Turnstile Capital Management, LLC (TCM), which are not affiliated entities. Certain restrictions and limitations may apply. Ascent Student Loan products are subject to credit qualification, completion of a loan application, verification of application information and certification of loan amount by a participating school. All loan products may not be available in certain jurisdictions. Other terms and conditions apply. Ascent is a federally registered trademark of TCM and may be used by RSB under limited license. Richland State Bank is a federally registered service mark of Richland State Bank.
* Application times vary depending on the applicants ability to supply the necessary information for submission.
* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers.
4 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
5 Important Disclosures for PNC.
PNC Bank is one of the nation’s largest education loan providers. For over 40 years, PNC has been committed to helping students and their families make possible the adventure of college.
6 Important Disclosures for SunTrust.
Before applying for a private student loan, SunTrust recommends comparing all financial aid alternatives including grants, scholarships, and both federal and private student loans. To view and compare the available features of SunTrust private student loans, visit https://www.suntrust.com/loans/student-loans/private.
Certain restrictions and limitations may apply. SunTrust Bank reserves the right to change or discontinue this loan program without notice. Availability of all loan programs is subject to approval under the SunTrust credit policy and other criteria and may not be available in certain jurisdictions.
SunTrust Bank, Member FDIC. ©2018 SunTrust Banks, Inc. SUNTRUST, the SunTrust logo and Custom Choice Loan are trademarks of SunTrust Banks, Inc. All rights reserved.
7 Important Disclosures for LendKey.
Additional terms and conditions apply. For more details see LendKey
8 Important Disclosures for CommonBond.
A government loan is made according to rules set by the U.S. Department of Education. Government loans have fixed interest rates, meaning that the interest rate on a government loan will never go up or down.
Government loans also permit borrowers in financial trouble to use certain options, such as income-based repayment, which may help some borrowers. Depending on the type of loan that you have, the government may discharge your loan if you die or become permanently disabled.
Depending on what type of government loan that you have, you may be eligible for loan forgiveness in exchange for performing certain types of public service. If you are an active-duty service member and you obtained your government loan before you were called to active duty, you are entitled to interest rate and repayment benefits for your loan.
A private student loan is not a government loan and is not regulated by the Department of Education. A private student loan is instead regulated like other consumer loans under both state and federal law and by the terms of the promissory note with your lender.
If your private student loan has a fixed interest rate, then that rate will never go up or down. If your private student loan has a variable interest rate, then that rate will vary depending on an index rate disclosed in your application. If the interest rate on the new private student loan is less than the interest rate on your government loans, your payments will be less if you refinance.
If you don’t pay a private student loan as agreed, the lender can refer your loan to a collection agency or sue you for the unpaid amount.
Remember also that like government loans, most private loans cannot be discharged if you file bankruptcy unless you can demonstrate that repayment of the loan would cause you an undue hardship. In most bankruptcy courts, proving undue hardship is very difficult for most borrowers.
9 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|3.69% – 10.94%1||Undergraduate, Graduate, and Parents||Visit CollegeAve|
|3.82% – 12.82%3||Undergraduate and Graduate||Visit Ascent|
|4.34% – 12.99%2||Undergraduate and Graduate||Visit Discover|
|4.12% – 10.98%*,4||Undergraduate and Graduate||Visit SallieMae|
|5.03% – 11.23%5||Undergraduate and Graduate||Visit PNC|
|3.88% – 12.88%6||Undergraduate and Graduate||Visit SunTrust|
|4.72% – 9.81%7||Undergraduate and Graduate||Visit LendKey|
|3.72% – 9.68%8||Undergraduate, Graduate, and Parents||Visit CommonBond|
|4.04% – 12.01%9||Undergraduate, Graduate, and Parents||Visit Citizens|